We purportedly have a freely floating exchange rate in Canada. And this exchange rate has floated downward considerably over the past six months. Here is one chart showing the trend over time. This graph shows the inverse, namely that the Canadian price of a US dollar has markedly increased recently:
I have several superficial, ad hoc observations about this phenomenon.
- The usual: unless and until prices adjust to account for the changing exchange rate, this change helps exporters and hurts importers (including retailers and consumers), ceteris paribus.
- Interest rates in the US have edged upward, and the Bank of Canada has signaled that it will likely try to keep interest rates lower. To the extent that financial capital flows back and forth in nanoseconds, relatively higher interest rates in the US may have reduced the demand for the Canuck buck (and increased the demand for the US dollar) somewhat.
- The price of gold has continued to plummet. But prices of other heavily traded resources have not. The drop in the US price of a loonie (or the rise in the Cdn$ price of a US $) probably has little to do with what is happening in the commodities markets.
- So what is left as a possible explanation?
Steve Polos took over as Governor of the Bank of Canada last spring. Steve has a long history of trying to help exporters (he was head of the Export Bank before becoming Governor), and it is quite clear that one way to help exporters is to depreciate the domestic currency (see this very clear piece by Scott Sumner).
I have read absolutely nothing indicating that there is a formal Bank of Canada policy to slightly depreciate the Canadian dollar. But it wouldn't surprise me at all if it is happening, especially since the change seems to have caught many people by surprise. And if we are experiencing a dirty float, so much for "forward guidance".
Addendum: I realize it doesn't have to be an explicit dirty float (i.e. direct interventions in the foreign exchange markets) to get this result. Just announcing that we're going to keep doing whatever is necessary to keep interest rates low while interest rates are rising in the US will have the same effect. It won't look exactly like a dirty float, but it will have the same effect.
Update: Called it.