Lately, mid-size companies that conduct business outside of Canada are feeling the impact as the Canadian dollar drops to recent lows, increasing the costs of foreign inventory, raw materials or services.
However, Business Banking clients who work with Scotiabank’s Derivatives Products Group can manage fluctuating exchange rates, by hedging, or locking in, the currency prices they pay. And, as Scotiabank FX specialists explain, it’s not too late to develop an ‘FX’ risk management strategy, to stabilize your currency rates, and your bottom line.
Ground moving beneath your feet
“These businesses have a lot on their plates,” observes Bridget Higgins, Director, Commercial FX & Derivatives Product Group. “Just in terms of currency rates, you can think of the 10 cent move in the USD/CAD exchange rate over the past 12 months as a 10 per cent increase in the cost of all your US-dollar denominated inputs, so that’s a direct impact on your business.”
While Higgins notes that Canadian exporters can benefit from a lower ‘loonie,’ the recent fluctuation in currency rates is a headache to both importers and exporters: “Our clients tell us that the biggest FX strain they feel is volatility. When rates change, it’s like the ground is moving beneath their feet. That’s where we can talk with them about the benefits of hedging some or all of that risk.”
Take charge of your currency rate risk
Currency volatility is definitely the case lately, since Higgins points to recent elevated USD/CAD exchange levels, not seen since the height of the pandemic, and intraday shifts in currency rates similar to spring 2020 when markets were spooked by the COVID-19 onset.
This uncertainty is unlikely to dissipate in the near term, suggests Higgins: “Directionally, we see the USD/CAD rate going lower, but moderating to more historically average levels once people overcome this concern about the world economy. And this is tied to the central banks reaching the end of their interest rate hike cycles.”
The good news is that a growing number of mid-size Canadian companies are recognizing the importance of managing their currency risks. “Our clients see their costs going up, whether from inflation, interest rates, or currency costs, and they want to manage these risks more proactively,” says Higgins.
That’s when Scotiabank FX specialists are happy to connect with Commercial Banking clients to explain solutions at their disposal. They range from regular ‘spot trading,’ which is buying currency on the spot as their needs arise, to buying ‘forwards contracts’, which are derivative products that allow a client to buy or sell currency at a specific price at a future point in time.
“We can help these companies be opportunistic and protect their business with relatively favorable exchange rates,” explains Higgins. “In addition, beyond vanilla forward products, we can help them achieve both downside protection and also participation in favourable market moves down the road.”
Scotiabank is one of the leading Canadian banks to offer these services to mid-sized companies - not just massive corporations. Members of the Derivatives Products Group work closely with Commercial Banking Relationship Managers to help their clients build proactive currency hedging strategies. They can then access FX services ranging from full-service strategy and sales support from dedicated currency experts, to 24-hour, self-directed, real-time trading and market rates in 30 major currencies.
Not too late to consider your exposures
Most importantly, if you think it’s too late to hedge your currency risks today, Higgins emphasizes that is not the case: “You have never missed the boat, since, for suitable clients, we have products that can incorporate outperformance strategies and achieve a more attractive rate than current spot prices. At the very least, it’s always beneficial to talk with us to understand your market exposures - whether it is FX, interest rate, or other risks - and how they impact your business. We’re here to demystify financial markets for clients, help you know your risks, so you can make informed decisions.”