Revisit client currency exposure

By Vikram Barhat | September 27, 2011 | Last updated on September 27, 2011
3 min read

The loonie, buffeted by global events, has been spending some time south of parity lately. Just long enough for Canadians to start thinking about rejigging their investment and business strategy.

BMO experts during a recent conference call said there are ways for the investors and businesses to deal with currency fluctuatuions, to protect themselves and even take advantage of the situation.

“This is a wonderful opportunity for people who’ve not been able to hedge their exposures to take a moment and revisit their current hedging strategy,” said Andrew Busch, global currency and public policy strategist, BMO Capital Markets. “We’re continuing to see pressure on the equity markets that leads to the U.S. dollar strength.”

Busch recommends investors to hedge 15% to 25% of their exposure going forward.

In the face of ongoing macroeconomic issues, the current risk-off mood of the market is not likely to change for some time, said Paul Taylor, chief investment officer, BMO Harris Private Banking. “I can say I’ve never seen the street as bearish and gloomy as it is; we’ve hard time finding anyone who’s close to [being] bullish; there’s a negative bias that the issues are not being addressed in a thorough fashion,” said Taylor. “The markets will continue to weigh in with their verdict which is not favorable; market’s still looking for tangible action.”

It’s still little bit early, he said, to go the other direction and go risk-on. “We’ll wait to see how things play out over the next few days and weeks and develop a better sense of direction,” added Taylor.

Despite the current gloomy market conditions, Taylor said things are not as bad as during the Lehman Brothers crisis. “I don’t think there’s a concern over the systemic risk that we saw during the Lehman Brothers crisis is in near and imminent danger, but the risk of a meaningful slowing of economic activity is widespread.”

Victor Pellegrino, vice president, commercial, BMO Financial Group, provided an overview of the impact that the fluctuating dollar is having on commercial customers and businesses.

“The appreciation of the dollar over the last 24-36 months has had in both sides a negative impact on the cost of operating,” said Pellegrino.

Businesses have had to readjust over the last 12 months to take advantage of an above par loonie. This has effected a culture change rarely seen before. “Their competitive edge may have been lost due to a lower dollar in the past, today we’re seeing a lot more companies are going out and buying equipment and upgrading, trying to increase productivity, be more competitive and leverage the fact that they’re got a stronger dollar.”

The recent fluctuations haven’t created any additional stress but the atmosphere around small businesses is still tenable, said Pellegrino. “There’s a bit of trepidation; a lot more planning, a lot more conversations are taking place about how to protect and hedge to make sure those fluctuations don’t become a disadvantage or become a negative on balance sheet.”

The timing of the slowing economy in the U.S. and the fear of European crisis couldn’t be worse for small business on the verge of expansion and cross-border purchases.

Market volatility is corporate market’s biggest enemy, said Michael Klopchic, vice president, corporate finance, BMO Financial Group.

While some of them try to take advantage of the various elements this volatility, most prefer to operate in a stable environment where they can better predict their business cycles and profitability.

“The weaker Canadian dollar for exporters is definitely going to be a big help but what really masks part of the problem is or doesn’t allow large corporations to take advantage of this volatility, though, is the hedging programs they’ve put in place,” said Klopchic. “They will be able to pick up some advantage by the weakening Canadian dollar but ultimately what we need is a longer-term view on the dollar and where is it going to be for this impact to be realized right down at the bottom line of the Canadian manufacturer and exporter.”

Foreign exchange issue is quite instrumental in decisions around where to locate, what to buy and when to buy or sell, he added.

Vikram Barhat