Whew.
That’s what producers may be exclaiming now that the Canadian dollar seems to have stopped its steady climb up Greenback Hill and is tumbling back down to friendlier territory.
However, farmers whose incomes rely on U.S. dollar sales or world prices set in U.S. dollars shouldn’t assume this year’s currency pain is over. Analysts say the Canadian dollar may be taking a breather before charging back higher.
It might be the time to hedge currency exposure.
“Some people think the dollar’s maybe topped,” market analyst Mike Jubinville of ProFarmer Canada told the Independent Dealers Entrepreneurial Association’s annual meeting Feb. 8.
Read Also
Russian pulse trouble reports denied
Russia’s pulse crop will be larger than last year, which won’t help prices rally from their doldrums.
“I think we’re going through a period of rationalization and consolidation in the dollar … but once we get into the second and third quarters of this year I think the dollar should start going up.”
He said the Canadian dollar may drop to 78 cents US, but if it doesn’t fall further, that point could be the start of another rally.
“If we can maintain that level on the chart, that maintains the longer-term trend up,” Jubinville said.
“It’s a 50 percent retracement from the high.”
In an interview, analyst Ken Ball of Union Securities in Winnipeg agreed.
“It’s a 50 percent pullback at 78 cents, and if the fundamentals continue to push that way, the next leg up could be as high as another 14 cents.”
That would take the Canadian dollar to more than 90 cents US Ð a heavy hit for farmers receiving U.S. dollars for livestock or crop sales.
Often when a commodity, stock or currency price surges, it will do so in spurts called “legs.” A regular pattern for these surges is a sharp price increase, followed by a retracement of about half of the increase. If the retreat doesn’t fall too far under the 50 percent level, the price will often soon turn higher, increasing by the same amount of the previous price surge in its second leg up.
Because the Canadian dollar has risen by about 14 cents in its recent rally and recently dropped to 80 cents from 85 cents, farmers may witness this phenomenon soon when the 78 cent level is neared.
No one can predict whether the dollar will hold above 78 cents, surge above it or fall beneath it, so there is no guaranteed way to get rich from speculating on the eventual level of the dollar.
“Forecasts can’t be what you base your strategy on,” Ball said. “As we’ve seen year after year, forecasts can be completely out of whack.”
However, because of the common pattern of a second leg up following a 50 percent retrenchment, farmers should protect themselves now that the dollar is lower than its peak a couple of months ago.
“We’re reaching the bottom of that range and you should be booking in some dollars,” Ball said.
Futures and options work well for general market exposure, regardless of whether a producer receives U.S. dollars in payment.
For a producer receiving money in U.S. dollars directly, an over-the-counter agreement at a bank or credit union can lock in an exchange rate now for future sales.
No hedging strategy is free of cost or risk. A producer using futures has to be prepared for margin calls. An option buyer has to be willing to pay a nonrefundable premium.
As well, a bank agreement forces the producer to produce real U.S. dollars to settle his side of the agreement.
However, Ball said it makes sense to do currency hedging now, when the dollar’s level is much lower than its recent peak.
“It’s probably time to take some action,” he said.
Forecasting the Canadian dollar’s direction can be a frustrating game. Two of Canada’s banks are forecasting the dollar will end the year at 78 to 79 cents, while the Bank of Nova Scotia predicts it will end at 90 cents.
Making a decision to lock the exchange rate now is not guaranteed to make money for a producer, but it will minimize the damage caused if the dollar suddenly surges again. That is the point of hedging.
“You have to live with the business decision,” Ball said.
“If you lock at 79 cents and it goes to 76 cents, did you make a bad decision? No. You made an excellent business decision, but those decisions aren’t perfect. It’s calculated risk avoidance.”
