What Carney Didn't Say

Carney Still Watching the Canadian Dollar ‘Closely’ (Update1)

By Gene Laverty
June 18 (Bloomberg) -- Bank of Canada Governor Mark Carney said he’s watching the Canadian dollar “closely,” the third time this month he’s expressed concern about the currency’s recent appreciation.
Asked if he would consider selling Canadian dollars to stem the rise, Carney told reporters today “intervention” won’t be effective without monetary policy that pushes the currency in the desired direction.
The higher dollar “does have potential to offset a number of the positive factors we’ve seen, so we’re watching it very closely,” Carney told reporters in Regina, Saskatchewan, following a speech.
“Intervention in and of itself, without policy action consistent with the direction of that intervention, is rarely effective in the long term,” Carney said. “But it is an option that always exists.”
The Canadian dollar weakened 0.1 percent to C$1.1327 per U.S. dollar at 4:20 p.m. in Toronto, from C$1.1318 yesterday. It earlier climbed as much as 0.7 percent.
A 15 percent gain for the Canadian dollar since March 9 is threatening to undermine the country’s already battered exporters.
Carney last voiced his concern to reporters June 11 in Montreal, describing the dollar’s rise as something that hasn’t happened in 50 years of floating exchange rates. The dollar has lost 3.2 percent since June 4 when the central bank first expressed concern the currency’s gains could choke the country’s recovery.

Commentary: When one reads between the lines it appears that the Bank of Canada is not prepared to let the dollar rise very far. Of course their options are limited, as the overnight rate is so low that there is really no room for further cuts. That leaves two options:
1) currency intervention
2) monetary policy actions (quantitative easing)
Carney states that the first option only has short term effects. So that leaves option number 2, follow the US in their quantitative easing game.
Net effect would be to attempt to follow the US currency down as they debauch their dollar against other world currencies. While I understand why the BoC wants to do this because of our dependancy on the US market for 75% of our exports, the consequences are troubling.
Will we start to affect the bond market and see our own borrowing costs and interest rates rise?
That remains to be seen.