Although many Canadian firms are using hedging to cushion the blow, the higher Canadian dollar is hurting more companies than it’s helping, according to a survey released Friday by the Bank of Canada.

In December 2004, the Bank of Canada sent Canadian banks who are members of the Canadian Foreign Exchange Committee a questionnaire that focused on the foreign exchange hedging activities of their corporate customers.

The purpose of the survey was to gain a better understanding of the degree to which hedging activities have insulated firms from movements in foreign exchange rates.

The Bank of Canada found that, “Banks estimate that, on average, more Canadian firms are negatively affected by the strength of the Canadian dollar over the past year than are positively affected.” Banks estimate that about half of their clients have been negatively affected by the appreciation of the currency during 2004. The other half of the banks’ client base is roughly split between those affected positively and those who experienced no material effects from the strength of the currency.

For the remainder of 2005, banks feel that these proportions won’t change very much. However, some banks indicated that the proportion of their clients that were being “very negatively” affected was beginning to increase, given the continued strength of the Canadian dollar.

The survey also found that natural hedges, especially higher commodity prices, is shielding many firms from the stronger currency. “Higher-than-expected commodity prices have been a major factor in moderating the more serious negative effects from the stronger-than-expected Canadian dollar.”

Many firms were also partially shielded from the strength of the Canadian dollar through 2004 by the protection afforded by existing financial hedges. “Nonetheless, banks reported that, on balance, the duration and coverage ratios of their clients’ financial hedges were modestly less than what might be considered typical. This partly reflects the speed of the Canadian dollar’s appreciation (especially between May and the end of November 2004), which exceeded the ability of many firms to respond in a timely and effective manner,” the survey says.

Finally, the survey found that a minority of corporate clients are having significant difficulty dealing with the stronger Canadian dollar. “Most banks noted that those firms experiencing “very negative” currency effects were concentrated primarily in specific sectors, such as pulp and paper or small manufacturing concerns.”

http://www.bank-banque-canada.ca/en/notices_fmd/2005/not0205.htm