Hedging helps against soaring loonie
The rollercoaster Canadian dollar has pummelled manufacturing and it’s likely to continue for some time.
The TD Bank quarterly economic forecast published in June paints anything but a rosy picture for Canadian industry, predicting continued export weakness through 2008 and 2009.
“Canadians would be best advised to buckle up for the ride,” says chief economist Don Drummond.
“When financial firms pay more or profit less in their lending activity, the knock-on effects to nonfinancial firms and consumers can be quite long lasting. The combination of rising lending rates, tightening credit conditions and a dwindling share of internal funds available for investment spells trouble,” he says.
This is bad news because weak US exports means our strong Canadian currency will continue to take chunks out of already razor-thin profit margins.
In late 2007 the federal government reduced the GST by 1% and the Ontario provincial government announced several tax measures aimed at providing some relief for the beleaguered manufacturing sector, but firms counting solely on these tax cuts will be disappointed.
According to Bill Murphy, national partner at KPMG’s Advisory Services arm in Toronto, hedging against US currency is the only way to mitigate its backbreaking impact.
“This can be the difference between surviving and not surviving in the manufacturing sector,” says Murphy, who explains there are two methods of hedging that manufacturers should employ.
The first is what he calls “natural hedging,” which involves modifying the basic elements of business to offset the rising dollar. Executed with diligence, this method has a dramatic impact.
The three basic elements are buying, selling and financing.
Companies buying commodity products, such as energy and raw materials, must consider the pricing driver of those commodities. While your supplier may be selling to you in Canadian dollars, the product may in fact be globally priced in US dollars, so the currency differences will have an impact.
The next area to consider is selling—who are you selling to, how is that denominated and to what extent are customers forcing you to absorb the currency movements?