It's become well established that Canada's central bank Governor likes metaphors. In a speech Tuesday, Stephen Poloz described the country's flexible exchange rate as "floating breakwater across the mouth of a harbour," and said the currency's relationship to the price of oil is "like a dog and its master, when connected by one of those leashes that stretch and rewind." The observant on Twitter were quick to add these to a list that includes spaghetti sauce and airplanes.
A comprehensive read of the Bank of Canada Governor's latest remarks brings another metaphor to mind – that of an innocent among the wicked, for Mr. Poloz is trying to convince cynical currency traders that he has risen above the temptation of seeking a short-term economic fix by manipulating the exchange rate.
For as long as he's been leading the central bank, Mr. Poloz has confronted suggestions that he is biased in a favour of a weaker exchange rate. David Laidler, one of Canada's most respected experts on monetary policy and Mr. Poloz's former professor at the University of Western Ontario, raised the question when I phoned him for some insight into the mystery man that former finance minister Jim Flaherty had chosen to lead the central bank in early May, 2013.
Each time Mr. Poloz says something negative about the Canadian economy, or something obvious about the economic impact of a stronger exchange rate, he is accused by someone somewhere of trying to "talk down" the dollar. Mr. Poloz protested often; his protests mostly were ignored.
Tuesday in Drummondville, Que., Mr. Poloz tried again to silence the doubters with perhaps the most lucid explanation of how the Bank of Canada approaches the exchange rate that any central bank official has made in public.
Mr. Poloz patiently explained the theory of how a floating exchange rate works as a shock absorber, rising when inflation get hots and falling when the economic growth begins to flag. He said Canada's exchange rate is tethered to resource prices, and that the central bank would have had to slash its benchmark rate to zero from 4 per cent in 2005 to keep the exchange rate at 85 U.S. cents. That only would have stoked inflation, hurting exporters' competitiveness by raising their input costs. He said intervention in foreign-exchange markets is based on the false impression that central banks know the appropriate level at which currencies should trade.
"I believe in markets," Mr. Poloz said. "Manipulating or trying to guide them is just not in our game plan. What the bank has done and will continue to do is be as clear as possible about how it sees the forces at play in the economy, and where the major sources of uncertainty and risk lie."
It was an important speech. The remarks represent Mr. Poloz's clearest articulation of his communications policy, which is to simply call it like he sees it. If he says a decline in the value of the dollar is helping economic growth, that's all he means. No games. No code words. No manipulation.
Mr. Poloz's problem is that traders and investors who buy and sell currencies distrust the central bankers who claim they don't use code words or play games. Currency traders, investors and the analysts who advise them are prone to conspiracy. They are convinced every central bank on the planet is obsessed by the exchange rate, and it will be difficult to persuade them otherwise.
Krishen Rangasamy, an economist at National Bank Financial in Montreal, cynically noted that Mr. Poloz omitted any mention of "stealth intervention," such as "sending out dovish messages despite strong data." Adrian Miller, director of fixed income strategy at GMP Securities in New York, echoed that sentiment in his own advice to clients. "Semantics are everything when it comes to comments from central bank officials," he said.
Most on Wall Street see the foreign-exchange markets as a "currency war." And it's easy to find examples: the Swiss National Bank has a target for the franc; European Central Bank President Mario Draghi literally talking down the euro by reminding traders that interest rates in the United States and Europe are headed in opposite directions; various emerging-market central banks unabashedly intervening in foreign-exchange markets to weaken their currencies.
It's important to note that many of the central banks that are "manipulating" their exchange rates are doing so because they are facing extreme circumstances. The Swiss franc surged in value by 20 per cent in a matter of weeks during the euro crisis, force the central bank to set a ceiling on the franc's value because the benchmark interest rate already is at zero. The euro remained high even though Europe's biggest economies are stagnant and deflation is a present danger. Many emerging markets are attempting to smooth excessive exchange-rate volatility.
Still, the belief that central banks are first and foremost concerned about exchange rates is firmly rooted in financial markets, with enough evidence to lift the notion above that of conspiracy. To convince traders otherwise, Mr. Poloz will have to consistently repeat his message of innocence – and be sure to apply it in practice.