The slumping Canadian dollar is a shot in the arm for many exporters, but those gains will be tempered by the hedging many put in place to protect themselves during the loonie’s long stretch above par.
Any drop in the dollar – it has fallen about 6 per cent this year and closed at 94.80 cents (U.S.) on Tuesday – usually benefits exporters because it makes their goods cheaper for foreign buyers. But many companies are no longer willing to deal with the volatile ups and downs that have whipsawed the dollar in the past half decade and have taken matters into their own hands.
“We hedge up to 75 per cent of the operational needs of our business,” said Ian Smith, chief executive officer of Clearwater Seafoods, a Halifax-based seafood producer that exports the bulk of its catch. That gave the company “wiggle room” when the Canadian dollar rose, he said.
When the Canadian dollar falls, as it has recently, Clearwater makes gains on its sales, but those are mitigated by losses on the hedging program. “The goal is to neutralize the impact of foreign exchange,” Mr. Smith said. “We don’t get too excited about a falling Canadian dollar [or] about it appreciating either.”
Mel Svendsen, chief executive officer of Standen’s Ltd., a Calgary-based manufacturer and exporter of suspension equipment for automotive and farm markets, said his company has hedged its currency exposure by pricing and selling its goods in U.S. dollars as much as possible.
That gave it protection when our dollar went up, “but you do trade off the access to the weak Canadian dollar when you do that,” Mr. Svendsen said. Overall, the drop in the dollar is good for Standen’s, “but not quite as lucrative as it might have been had we not been working so hard to combat the opposite issue,” he said.
Mr. Svendsen said he would prefer that the dollar stay in the 90-to-95-cent (U.S.) range.
He might get his wish, if some economists are correct.
Scotiabank’s chief currency strategist, Camilla Sutton, issued a report on Tuesday predicting that the Canadian dollar will weaken further in the near term, and sink to about 94 cents in the fourth quarter. Toronto-Dominion Bank economists recently said they expect the dollar to fall as low as 90 cents by early next year.
A lower dollar would probably take pressure off newly minted Bank of Canada governor Stephen Poloz, because it would give a boost to the economy and remove any need for the central bank to lower rates further to provide more stimulus.
Jayson Myers, president of Canadian Manufacturers & Exporters, said a lower Canadian dollar is broadly “more good news than a challenge” for Canadian industry. A higher U.S. dollar boosts cash flow for most companies selling south of the border, and – more importantly – is an indication that the economy of the United States is improving, he said.
A stronger housing market and improved auto sales in the United States will spin off into Canada, Mr. Myers said, and provide a boost at a time when the Canadian economy is a bit sluggish.
Still, he said, there is a flip side in that a lower Canadian dollar increases the cost of imported components and equipment, and that could dampen Canadian firms’ investments in increased productivity.
While more Canadian exporters are using hedging strategies to deal with currency fluctuations, Mr. Myers said, many are also selling beyond the United States to make sure that they have more balanced export markets. Others have set up production in the United States, giving them a natural hedge against currency shifts.
Those exporters that have no hedges in place are unabashedly cheering the drop in the Canadian dollar. Herb Wilson, chief executive officer of Polaris Minerals Corp. – a company that ships construction aggregate from Vancouver Island to U.S. destinations – said the shift is very helpful for his firm.
Polaris gets almost all of its revenue in U.S. dollars while production costs are almost all Canadian. If the dollar were at 90 cents, “we’d be awfully happy,” Mr. Wilson said.