A company of any size can protect itself from U.S. dollar fluctuations
U.S. dollar v. Canadian dollar
SOURCE: Bank of Canada
The importance of currency strategies
Recently, I argued that the exchange-rate effects from QE3 were overrated, in part because Canadian exporters have ways to reduce their net transactional currency exposure to the U.S. dollar. These are not necessarily financial hedges, which do little to insulate against long-term currency movements and are largely unavailable to small business. Rather Canadian exporters can find creative ways to construct natural hedges to reduce - and often eliminate - their foreign exchange exposure. These strategies are open to companies of all sizes and currency profiles. The private sector company I co-own, Nexreg Compliance, has fewer than 20 employees and uses three strategies to successfully reduce our otherwise extreme exposure to the U.S. dollar (more than 60 percent of our sales are with U.S. clients).
Pay Canadian suppliers in U.S. dollars
Just because some of your suppliers are in Canada does not mean the transaction need be denominated in Canadian dollars. Whenever Nexreg negotiates a deal with any supplier, whether they are located in the United States, Canada or anywhere else in the world, we request that the quote be given in U.S. dollars. Most Canadian suppliers are happy to do so, not just because they would like our business, but many are net importers into Canada from the United States, so denominating in U.S. dollars also reduces their forex exposure. Naturally there is only so far a company can push this as tax bills must still be paid in Canadian dollars. And if anyone in Canada has figured out how to get their employees to agree to be paid in U.S. dollars, please let me know.
Get U.S. customers to pay in loonies
As Canadian exporters, we simply assume that no American companies are interested in paying in Canadian dollars. But this simply is not true. One option is to simply provide all quotes to U.S. companies in both U.S. dollars and Canadian dollars, with the Canadian dollar equivalent being a few tenths of a percent cheaper at the current exchange rate. On occasion an American company will choose the Canadian payment option, either because it is slightly cheaper or because they have a net exposure to the Canadian dollar, so the deal acts as a natural hedge for them as well. In my experience this happens only in one deal in 15 or one deal in 20, but even a five percentage point reduction in U.S. forex exposure can significantly reduce risks.
Avoid denominating non-U.S. transactions in U.S. dollars
When a Canadian company exports to a country such as South Korea, the transaction is neither denominated in Canadian dollars or South Korean won. International invoicing is typically done in one of four currencies – the U.S. dollar, the euro, the Japanese yen or the U.K. pound sterling. Canadian companies will large U.S. dollar exposures should propose negotiating these deals in one of the three other currencies. This does not reduce overall forex exposure, but alters it by reducing U.S. dollar exposure and increasing yen exposure. But since movements in the U.S. dollar and yen are not perfectly correlated, this reduces overall portfolio volatility and therefore reduces risk.