When Bank of Canada Governor Mark Carney stands up to address Canada's auto workers this week, he will be coming face to face with some of the people who have paid the highest price for the central bank's decision to tolerate the loonie's recent surge.
The currency's appreciation is one of the biggest challenges facing the industry. As the Canadian Auto Workers started new contract negotiations last week with General Motors Corp., Ford Motor Co., and Chrysler Group LLC, newspapers were filled with stories about how Canada is the most expensive place on earth to build a vehicle. "With the dollar at par, we can see fairly clearly what the Canadian landscape looks like in North America," the New York Times quoted an unnamed Ford Canada executive as saying. "When labour costs are unequal, it makes it more difficult to make the business case for Canada."
Mr. Carney, who concedes a stronger dollar is making Canadian industry less competitive, is due to speak to the union in Toronto on Wednesday, the first Bank of Canada governor to address organized labour in a public setting.
His speech is about financial stability, and the CAW hasn't asked their guest to talk about the currency. Still, it's unlikely that someone with Mr. Carney's unique ability to influence the value of the dollar will be allowed to leave without explaining Ottawa's reluctance to do so.
When the CAW negotiated its last contracts with the Detroit Three, one Canadian dollar bought only about 80 U.S. cents – which research by the Organization for Economic Co-operation and Development and others suggests is the fair value of Canada's currency.
A gap that big in the exchange rate makes Canada an attractive option for an American company, as it can shave its labour bill simply by locating production north of the border. But now, the loonie is trading at par with the greenback. Canada suddenly looks less attractive, especially when skilled labour in states such as Indiana is willing to work for less.
Mr. Carney, if he were willing, could level the field.
One of the reasons Canada's dollar is so strong is international investors are gobbling up Canadian bonds, which they see as a haven from the turmoil in the United States and elsewhere. The difference between the value of securities bought and sold by non-Canadians was $26.1-billion in May, a record. All that buying is putting upward pressure on the currency in which the securities are denominated.
The Bank of Canada could counteract the effect of this demand for Canadian debt by minting loonies to purchase U.S. assets, driving up the value of the greenback against Canada's dollar. This is a popular tactic in developing economies. The Bank of Japan has also dabbled in it, and the Swiss National Bank has made printing francs to buy euros the core of its current policy.
But to the chagrin of organized labour and many in the manufacturing industry, Mr. Carney shows little appetite for the intervention game. The Bank of Canada prides itself on sticking to the tried-and-true methods of guiding an economy like Canada's. "What we want to see with the dollar is that it is reflecting the underlying economic fundamentals in Canada," Mr. Carney said in an interview with CTV News earlier this month. "Those fundamentals are strong, relative to the rest of the world."
Some see this approach as overly doctrinaire. Erin Weir, an economist at the Canadian Centre for Policy Alternatives, a research group that tends to align with organized labour, says the Bank of Canada adheres to an inflation "theology" when it should be more concerned about creating jobs. Mr. Weir points to the preamble of the Bank of Canada Act, originally passed in 1934, that says the central bank has a responsibility to mitigate "fluctuations" not only in prices, but in overall production, trade and employment. "The Bank of Canada has interpreted its mandate too narrowly," Mr. Weir said in an interview.
Working against Mr. Weir's argument are the marching orders the Bank of Canada received from the Finance Department just last year. Mr. Carney's mandate is to keep inflation advancing at a pace of about 2 per cent a year and to keep the financial system stable. Those goals are achieved by taking a longer, broader view. The currency is fundamentally stronger because of Canada's booming commodity industries. It would take a lot of firepower to print all the money that would be needed to fight that trend. On the other hand, it's pretty certain that doing so would destroy the central bank's inflation-fighting credibility.
"Monetary policy could do something about the currency, but it shouldn't," said Christopher Ragan, an economist at McGill University in Montreal and former adviser at the central bank. "If inflation is the goal, you can't be ambivalent about it."