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As loonie nears parity, firms scramble to hedge bets

Loonie and U.S. dollar

Adrian Wyld/Adrian Wyld/CP

As the soaring Canadian dollar pushes ever closer to parity with its U.S. counterpart, Canadian companies are rushing to insulate their businesses from currency swings.

Foreign-exchange firms say they're fielding a barrage of calls in recent days from companies wanting to hedge their exposure to the surging loonie.

Marie Boivin, managing director of Ottawa-based Accu-Rate, said she is receiving more than double the amount of enquires in the past week, particularly from medium-sized businesses, prompting her to hire an additional commercial account teller.

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"Many businesses are asking if it's a good idea to hedge their future transactions when the U.S. and Canadian dollar are nearly at par and we of course say, 'Yes, all the way,'" she said.

The move to hedging suggests that a growing number of companies believe the currency will stay at strong levels, as they adopt strategies they hope will reduce risk and provide some peace of mind.

Smaller firms are the most at-risk types of companies to volatile exchange rates, given that they tend to have less resources to devote to currency strategizing and are more internationalized.

"My phone's ringing off the hook" with many small and medium-size businesses seeking hedging advice," said Rahim Madhavji, president of Toronto-based Knightsbridge Foreign Exchange. Callers range from software and telecom companies to textile manufacturers and consultancies, he said.

The Canadian dollar strengthened to a near two-year high Monday, closing at 99.72 cents (U.S.), its highest level since July, 2008, after zooming to 99.89 cents earlier in the day as gasoline and oil prices hit 18-month highs. The currency has risen 5 per cent this year.

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The increase has gone hand-in-hand with a string of better-than-expected economic readings on everything from GDP and housing to jobs and manufacturing.

Pareto Corp. chief financial officer Karen Trudell has increased hedging in recent months by locking in some prices for U.S.-based travel incentive costs.

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"The big benefit is cost certainty, and stability. The ups and downs and volatility are just difficult to manage," the Toronto-based marketing company's CFO said. "As a financial person you don't want to find yourself in a situation that you're not able to manage or predict or control. This helps plan where my expenses are going to be."

Export Development Canada launched a website last week to help Canadian companies learn how to protect themselves. It says 57 per cent of firms have at least one form of hedging activity, while the rest don't currently hedge against currency risk. The agency says hedging can help companies mitigate risk.

According to its website, there are two types of hedging: natural hedging and financial hedging. The first is when a company tries to match revenues in a foreign currency with costs in that same foreign currency.

The second relates to financial products that companies can use to smooth out price swings, such as foreign-exchange forward contracts, currency options and swaps - which are generally bought from banks or currency brokers.


Ted Lattimore, chief executive officer of Victoria-based solar lighting manufacturer Carmanah Technologies Corp., said hedging is one of a number of strategies the company is now using to deal with the rising Canadian dollar.

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The company has also outsourced its production, so almost all its manufacturing costs are in U.S. dollars. At the same time most of its sales - whether in the United States or elsewhere - are also denominated in U.S. dollars.

That has eliminated foreign exchange risk, although it has also forced the company to shift its financial reporting to U.S. currency.

The company has to hedge only the portion of its business that is conducted in Canadian dollars - and that is mostly salaries and administration expenses. "We can hedge those relatively fixed expenses rather easily," Mr. Lattimore said, because they are very stable.

Consequently, compared to a few years ago, "regardless of whether the dollar goes up or down, we are in much better shape," Mr. Lattimore said.

There is a risk to hedging - namely that companies with little expertise in currency markets could lock in prices at the wrong level. But Ms. Trudell said that risk is worthwhile because hedging gives her firm added stability. She likened the strategy to people who opt for five-year fixed mortgages. "They're willing to take the risk of maybe leaving a little money on the table, but the not worrying about it - and the predictability of it - is worth it."

The loonie has strengthened against a host of currencies in recent months, including the greenback, the euro and the British pound. Still, some companies remain exposed to currency swings. Kingsway Financial Services Inc. and Harry Winston Diamond Corp. recently said the currency's fluctuations are eating into earnings.

With files from Richard Blackwell.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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