How To: Ride the Wild Loonie

Wicked Twister, Shivering Timbers and Phantom’s Revenge are the latest winners of the Coaster’s Choice Awards, an annual poll of theme-park thrill-seekers. They should strap themselves into another roller coaster that could top the list in 2004: The Loonie.

Rapid and unexpected currency fluctuations — such as the recent jump in the Canadian dollar versus the U.S. buck — can make any cross-border trader queasy. Thankfully, there are several ways to smooth out the ride.

1. Shorten your terms of trade If you are locked into long-term contracts that expose you to shifts in currency, then renegotiate for shorter terms.
2. Reduce costs If the currency current is draining your bottom line, then cut spending that doesn’t impact sales. And don’t neglect opportunities to source cheap but effective offshore labor.
3. Sell in Canadian dollars Set your prices in Canadian dollars, and you’ll always know how much cash a sale will generate. But as the loonie rises, so do your real prices for foreign clients. “Only a few exporters in specialized areas can do that,” notes Jayson Myers, chief economist of Canadian Manufacturers and Exporters in Mississauga, Ont. Avoid this tactic unless your product is in high-demand and has little competition.
4. Play to the loonie’s strength — or weakness When our dollar surges, look to foreign sources of supplies and capital goods. When the loonie lags, buy more Canadian.
5. Diversify export markets “It’s that old saying, ‘Don’t put all of your eggs in one basket’,” says Pierre Bertrand, assistant vice-president of the Business Development Bank of Canada. Furthermore, the loonie may rise against one currency while falling against another, so shift your focus accordingly. For instance, the loonie has recently depreciated against the euro, making the EU a more attractive export market.
6. Hedge your bets Currency hedging through the purchase of forward contracts and options, which guarantee the future price of a currency, can offer affordable protection over the short term — if you guess the direction of the currency correctly.

© 2004 Jeff Sanford