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The Exchange Rate Opportunity

07/06/2016


​Low growth is the new normal for Canada’s economy. Falling commodity prices, a slumping oil sector and sluggish economies around the world are making it difficult to gain any sort of momentum. It is even possible for companies to achieve meaningful growth in this environment?

Absolutely. Even in today’s low-growth world, enterprising companies can use a variety of strategies to achieve superior growth and strengthen their competitive position. Capitalizing on the fluctuating value of the Canadian dollar and other currencies is one such strategy — and it can enable companies to manage risk, controls costs and improve margins. Yet many small and mid-sized Canadian businesses lack plans and policies for managing currency rate shifts. Closing that gap can make a measurable impact on companies’ performance.

The good and bad of currency fluctuations​

Traditionally, a low Canadian dollar has provided an important boost for Canadian manufacturers and other exporters, making their products less expensive on the global market. Other sectors such as film and television production also benefit from a falling loonie. However, a weaker Canadian dollar can create headaches for companies who rely on imports, as it can quickly drive up input costs.

Canadian companies are likely just beginning to see the impact of the most recent decline in our dollar’s value. Companies should take steps to identify how their business is being affected by shifting exchange rates and what it means over the longer term. Then, companies should determine what changes are needed to mitigate any currency-related risk — and seize any opportunities that may arise.

Managing currency risk

There are a variety of ways companies can change aspects of their business to protect against the impact of currency fluctuations.

Exporters can create a natural hedge against exchange risks — and achieve a quick boost to the balance sheet — by incurring input costs in Canadian dollars while selling in U.S. dollars. Alternatively, sales in foreign currencies can be offset by shifting suppliers so some costs are incurred in that same currency. Companies who exploited the strong Canadian dollar in recent years to buy U.S. plants and other assets, for example, can shift production or sales to those facilities in order to serve U.S. customers and protect against rising costs.

Even beyond this, companies should also look at all aspects of their supply chain and operations to ensure they’re taking maximum advantage of exchange rates. Engaging a new supplier for certain inputs can help reduce costs and lessen the blow of changes in the dollar’s value.

Using financial instruments to hedge currency risks

Companies can also use a variety of financial instruments to hedge against currency fluctuations.

  • A forward contract is an instrument that obligates a company to buy or sell a specific amount of currency at a set exchange rate on a specific date. Forwards aren’t especially flexible, however.
  • Futures contracts allow companies to buy or sell a currency at a set exchange rate in a particular month. Unlike forwards, futures are very liquid; companies can close them out prior to their settlement date, providing companies with much more flexibility.
  • Currency options are another highly flexible instrument that provides companies with the right — but not an obligation — to buy or sell a currency at a set exchange rate during a specific period of time.

While forwards, futures and options are traditional means of currency hedging, it isn’t always easy to determine the optimum approach or instrument mix. Companies should engage their banker or other professional advisor for help.

Avoid the “low-cost producer” trap

The weaker Canadian dollar is undoubtedly a boon for Canadian exporters. However, it’s important that Canadian companies don’t pin their growth strategy on the fact that their products are now less expensive.

The fact is that even with a lower dollar, Canadian companies aren’t typically low-cost producers and haven’t been for decades. Therefore, companies need to compete on other advantages — such as superior product quality, customization, or outstanding customer service. All are areas where Canadian firms can set themselves apart and outcompete others whose principal advantage is cost alone.

The importance of a good financial function

When coming to grips with the impact of currency fluctuations — and exploiting the opportunities they create — a sophisticated financial function can benefit companies enormously. Companies should invest in upgrading the quality of their financial management and reporting, and improve the tools, technologies and processes used to gather, process and manage financial data. Hiring an experienced Chief Financial Officer can significantly improve a company’s ability to make sense of its financial data and make the right decisions to manage its exchange rate risks and other aspects of the business.

Managing currency fluctuations: A growth lever in tough times

Your business doesn’t have to be held back by a low-growth economy. There are many ways your company can expand, grow revenues and improve margins in today’s business environment — and managing currency fluctuations is one of the levers your team can use. A professional advisor can help you develop a plan to mitigate your currency risk, capitalize on opportunities and move your business forward.

If you’d like to discuss how your company can achieve its growth ambitions in a low-growth world, contact John Hughes, Senior Vice President, Private Enterprise at 416-596-1711 or [email protected]