Economist expects the loonie to fluctuate between 75 and 80 cents U.S., and some experts suggests a hedging strategy to reduce risk
Export Development Canada expects the Canadian dollar to hover around US75 to 80 cents over the next five years, but it will continue to bounce around a lot.
EDC’s forecasting model uses factors such as oil and gas prices, other commodity prices and the outlook for Canadian short-term interest rates versus the United States and the U.S. dollar.
Peter Hall, chief economist for EDC, said the model suggests the dollar will average 75 cents for the remainder of this year, 77 cents next year and then rise to more than 80 cents over the next five years.
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However, exporters shouldn’t expect a straight line on the path from 75 to 80 cents. Instead, it will be more like a zigzag.
“It’s going to be a rough ride over the next little while,” he told businesspeople attending a Saskatchewan Trade and Export Partnership luncheon.
Factors that influence the Canadian dollar were forced out of equilibrium by the U.S. quantitative easing bond buying program that was implemented in 2008 to stimulate the American economy following the global economic collapse.
The program ended in 2014, and markets are still trying to sort out life in a post quantitative easing world, which is causing the volatility.
Grant Whitmore, a trader with XPT Grain Inc., a small Regina firm that ships peas and flax to China, said currency volatility is the bane of his existence.
“When it changes on a weekly basis, it becomes very difficult,” he said.
XPT negotiates contracts with processors in China, takes payment up front and then uses the money to pay farmers when they deliver grain three to four months down the road.
“We have to sit back and be very, very careful where we put that money,” said Whitmore.
It can cause huge problems for a small company that sells grain when the loonie is 75 cents and then buy it from farmers months later when it has risen to 80 cents.
When that happens, they have to try renegotiating with the buyer or further squeeze already tight margins.
The loonie has been on a roller-coaster ride of late. It was trading at 83 cents a year ago, fell to a low of 68 cents in January, rebounded to flirt with 80 cents and then last week settled back to 78 cents.
Whitmore said a stable currency would make it easier for a small exporter like XPT to conduct business.
A lower loonie is obviously better for Canadian exporters. It becomes harder for XPT to compete with aggressive American exporters as the dollar creeps closer to 80 cents.
Hall said EDC and other companies offer products that can reduce the risk of currency volatility.
“A hedging strategy is not a bad option when it comes to a market that is as volatile as the one that we see at the moment,” he said.
However, EDC’s surveys of small and medium sized exporters have found they tend to avoid hedging currency. Most of them prefer ride out the ebbs and flows.
