As the Canadian dollar hovers around lows that it hasn’t touched for nearly a year, experts are urging investors and small businesses to hedge their currency exposure, and to plan for ongoing volatility in exchange rates.
“We’ve seen [the dollar] break parity, and once it broke, it moved very quickly,” said Andrew Busch, global currency and public policy strategist at BMO Capital Markets, speaking on a conference call on Friday. “It’s a wonderful opportunity for people who have not been able to hedge their exposures to take a moment now and revise their current hedging strategy.”
Busch urges investors to hedge 25% to 50% of their currency exposure. Business owners are also being forced to assess their hedging strategies as volatility continues, according to Victor Pellegrino, vice president of commercial at BMO Financial Group.
“A lot more planning, a lot more conversations are taking place about how to protect and how to hedge to make sure that those fluctuations don’t become a disadvantage or don’t become a negative on the balance sheet,” he said.
Small businesses, in particular, are struggling with the recent movements in currency markets, and are asking for help, Pellegrino said.
Michael Klopchic, vice president of corporate finance at BMO Financial Group said many businesses are postponing plans for cross-border growth and purchases until the currency stabilizes.
“The foreign exchange issue has come up and has been quite instrumental in some of the decisions that are being made in terms of where to locate, what to buy and when to buy it, or when to sell it,” he said.
But businesses shouldn’t expect to get much clarity anytime soon, the speakers said. Given the severity of the underlying causes for the current market volatility – including the financial crisis in Europe and its wide-reaching implications – volatile conditions are likely to continue.
“The underlying dynamics of this, to me, mean that it’s not going to be solved anytime soon,” said Busch. He said in order for markets to stabilize, investors need to see leaders take meaningful steps towards resolving the crisis in the eurozone.
“I think the selloff in equities is more reflective of not only slowing growth,” he said, “but just the complete lack of leadership coming from Europe to do something decisive. And that’s really what the markets want: we want some certainty out of Europe.”
Even a default for Greece could be positive for markets, Busch said, in the sense that it would give investors certainty about where to go from here.
“It would alleviate some of the uncertainty that’s out there,” he said.
Paul Taylor, chief investment officer at BMO Harris Private Banking, said his investment team is still underweight on equities. Although corporate earnings have been strong, he suspects they could be negatively affected by weakening economic conditions and lower commodity prices.
“At this particular stage, we’re reluctant to step back into equities,” he said. “Our view is that the conditions for any sort of sustained rally are just not there right now.”