MNI INTERVIEW: BOC Seen Getting CAD Relief From Fed Taper Talk

Tiff Macklem is getting a hand from Jerome Powell's taper talk, relieving pressure on the BOC Governor to take some steam out of the northern nation's dollar, former central bank researcher and CIBC Senior Economist Royce Mendes told MNI.

Canada's dollar reached the strongest since 2015 at CAD1.20 earlier this month and Mendes said it needs to weaken to CAD1.30 before it's competitive for manufacturers to win new orders and build production capacity. Powell's shift towards the stance of Macklem, who has already tapered twice and the market expects will likely do so again in July, should bring the currency to CAD1.25 this year and CAD1.30 by the end of next year, Mendes said.

"The Federal Reserve is now helping the Bank of Canada by pulling forward some of the expectations for interest-rate hikes in the U.S. and we continue to see that happening," said Mendes, who at the BOC was a foreign reserve portfolio manager and principal researcher in the financial markets branch.

Macklem hours after Wednesday's Fed decision again walked a fine line between telling lawmakers that most of the gains in the "loonie" are justified by stronger exported commodity prices, while also noting major gains could drag on expected shipments and investment. Mendes sees the BOC's view of the currency's gain as overly optimistic.

Fed Chair Jerome Powell during his press conference last week for the first time acknowledged policymakers are "talking about talking about" tapering QE.

OPEN MOUTH OPERATIONS

"The Canadian dollar is still too strong to be consistent with a balanced economy, post Covid," Mendes said. "We have recommended that the Bank of Canada use some 'open mouth operations' to try and talk about the effect on inflation or exports a little bit more around the strong Canadian dollar."

The economy is at risk of fading out with signs that prices for lumber and some metals are already easing off, leaving growth again too dependent on consumer spending while squeezing manufacturers and other firms, Mendes said.

With markets pricing in the BOC tapering its CAD3 billion weekly QE pace at the next meeting in July and another move later this year, there's less reason for the Canadian dollar to stand out following the FOMC opening up taper talks, he said.

Canada's dollar may also get less lift now from BOC guidance for raising its 0.25% policy rate in the second half of next year when its single mandate of sustainable 2% inflation is expected to be restored. That's because like the Fed, Macklem has signaled he will run the economy hotter through this rebound to boost the job market, Mendes said.

Macklem on Wednesday highlighted a gap of 750,000 between current employment and where it would be absent the pandemic, and said the recovery must include hard-hit groups such as women and youth.

"There's just more tolerance for a little bit of above target inflation," to create more jobs, Mendes said. "There's a little bit more room, and we do want to try to capture some of these groups of Americans or Canadians that had more trouble in the labor market."