The Blue Castle is my favourite book!=) The only information I've found on the name Valancy is that there was a Canadian poet, Isabella Valancy Crawford in the 19th century. I think her family might have been Scottish. It's possible that LMM was familiar with her work.
If anyone has more information, I'd love to know! How do you pronounce it? I think of it as similar to Valencia, but I've also heard it pronounced more like the window treatment. =)