Currency exchange risk is all about timing
Keeping an eye on currency fluctuation and the behavior of pairs can make exporters' products more price competitive
In a competitive manufacturing environment, it’s wise to compete on quality instead of price. Unfortunately, in many industrial markets, competing on price is the standard rule.
Regardless of whether you’re an importer, exporter, manufacturer or distributor, price dominates our attention. Canadian companies use our dollar in global purchasing to reduce production costs, yet the high value of the loonie doesn’t allow exporters to compete successfully on price.
Added to that, business cycles and our fluctuating dollar influence the timing of importers’ purchases from our domestic manufacturers.
Major pairs of currencies (the majors) can fluctuate against each other from five to 10 percent in a period of two to three months, and occasionally even more. If Canadian exporters properly time currency exchange, their global customers could tap into discounts to the tune of five to 10 percent.
If your company exports to peripheral countries, the currency fluctuation effect could translate to an even bigger discount for your customer of 15 to 25 percent. To achieve these discounts for foreign buyers, you should watch fluctuations of the Canadian dollar, and fluctuations of the importer’s currency as well.
Good international market development and penetration strategies focus on passing currency exchange gains on to foreign customers. Canadian exporters who use this strategy should focus their marketing efforts on countries with currencies that increase their value against the Canadian dollar.
They should also time their sales and marketing activities to periods when our dollar trends lower against importers’ currencies.
This strategy passes the currency exchange gain on to the importer and makes exported product less expensive, without affecting the exporter’s profit. The currency exchange contributes strategically to the exporter’s international competitiveness, and reduces the need for an additional price discount. Basically, it improves your company’s position in a price conscious environment.
Passing currency exchange gains along to customers can be complicated, when you consider international distribution channels. The challenge lies in convincing international distributors to communicate and then pass the Canadian exporter’s currency gain on to their customer.
For some exporters, the solution involves setting up a foreign language web site, targeting a particular country or a global region.
Aside from leveraging discounts for global customers, Canadian manufacturers are also impacted by currency on the importing side. They use global purchasing power to lower the cost of their supplies in order to stay competitive. But by doing so, they’re exposing themselves to the high risk of currency exchange losses.
If your company exchanges Canadian dollars on a ‘need-to’ basis to pay for international supplies, your bottom line may suffer from severe currency exchange losses and unfortunately, management likely won’t even realize it.
When importing goods, your currency exchange transactions should be placed when the Canadian dollar is at its highest peak in comparison to your supplier’s currency.
When the currency exchange transaction is properly timed, it puts the gain into the Canadian importer’s operational profit without impacting the profit of the exporter. These potential profits could be valued at 10 to 25 percent of the total delivered cost of international goods.
In order for Canadian exporters and importers to take advantage of currency exchanges, they have to realize a major conceptual difference between a currency exchange rate and a currency pair.
This distinction serves as a basic tool for exporters and importers to understand currency fluctuations that may occur daily, weekly, monthly and annually.
In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, FX rate) between two currencies is the rate at which one currency will be exchanged for another. It’s also considered as the value of one country’s currency in relation to another.
When an exporter or importer calls the bank for information on currency exchange rates between the Canadian and US dollar, the teller instantly provides the rate. But it’s a rather stagnant concept because it provides a picture of a currency pair in a very small time period. In finances, this time period could be as small as 25 seconds to a few minutes.
If the same exporter or importer were to call the bank half an hour later, the currency exchange rate between the Canadian and US dollar will be different. Calling the bank every half hour in an attempt to look for a better exchange rate would be frustrating, and it doesn’t answer the most important questions:
• Where should I export my product based on the currency exchange information?
• When should I approach buyers from a certain country for a successful sale?
• Where should I buy supplies if the decision is based strictly on price?
• When should I approach my suppliers to get the best value?
The simplicity of the term ‘currency exchange rate’ doesn’t reflect the fluidity of the currency market and is of minimal benefit to exporters and importers.
But the concept of ‘currency pair’ focuses on the fluidity of a relationship between any two currencies. It may allow for the evaluation of movements of two currencies during a certain time period. The comparison of one currency movement against another forms a modern currency exchange market.
Using the concept of currency pair, exporters and importers are able to evaluate international target markets and recognize when to approach them for a successful sale. But local bank tellers aren’t typically trained or prepared to answer questions relating to currency pairs.
The bank teller usually can’t tell you how a pair, such as the USD/CAD behaved today, last week or last month. Nor will the teller be able to answer more advanced questions such as:
• Will the Canadian dollar increase its value against the USD this month?
• How did employment or inflation data impact the USD/CAD pair last month?
• Is it in the Fed’s interest to lower the USD this month (and make many currencies including CAD more expensive)?
When making a rational decision, the lead question for an exporter in a near-term selling transaction may be: Should I approach a buyer in the US in about three weeks or should I wait to sell my goods another 12 weeks? The USD/CAD pair may be in a stagnant and quiet time. Therefore; it might not matter if you wait.
In my next article, I’ll evaluate simple movements within a currency pair and time factors as they influence currency exchange risk.