07-05-2025
How Canadian Businesses Can Manage Volatility Amid Trade Wars
Rahim Madhavji is the president of Knightsbridge Foreign Exchange.
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With changes in global policy settling in, businesses in Canada are contending with volatility. Whether it's the fluctuating Canadian dollar (aka loonie), dips in the stock markets or slowdown in cross-border trade, it's clear companies must adapt or risk falling behind.
At the same time, when conditions seem to change or reverse course consistently, keeping up is its own job. Making the best decisions to improve your position comes down to more than educated guesswork when the international stakes are high. So, how can companies approach volatility head-on?
Look to recessionary reminders.
Recession is an unfortunate potential under current conditions, but it also provides business owners with important indicators of how currency may behave. Typically, in a recession, the Canadian dollar loses value relative to the U.S. dollar, as the U.S. dollar is a safe-haven currency.
Generally, though not exclusively, foreign exchange (FX) rates tend to decline overall during a recession due to less demand for a depreciating currency. However, during the 2008 financial crisis, for example, the U.S. dollar rose, going against the grain and closing out the year at a 1.224 exchange rate compared to the loonie.
Currency won't follow a predetermined pattern, but some trends can be helpful to think about as you formulate a response. Beyond exchange rates, keeping an eye on inflation, unemployment and consumer confidence helps gain a clearer picture of the economic outlook.
Confidence recently hit a four-year low in the U.S. (registration required), while Canada is seeing significant economic dips. What's most helpful in the face of these kinds of conditions is to look at past customer behavior in times of recession or similar as a guide for potential sales drops.
Weigh depreciation and demand.
If the loonie depreciates significantly, importers, exporters and traders will see serious implications. For importers, a depreciated loonie means higher costs of production, which could ultimately see these organizations see more demand abroad than at home. Exporters will fare better with a depreciated dollar, with lower exchange rates making business cheaper.
A recent report from S&P Global expects uncertainty in Canada-U.S. trade to weigh on consumer and business sentiment, projecting a quarterly annualized growth rate averaging 1.2% for the rest of the year. No matter where you land, it's important to take a look at the market and act quickly during favorable conditions. If businesses fear a rising U.S. dollar, they could buy U.S. dollars in advance in bulk and hold them.
Brush up on currency risks.
Whether exchanging or trading internationally, it's important to understand risks specific to currency. Risk arises in three main categories: transaction risk, translation risk and economic risk, each of which requires its own considerations.
• Transaction risk originates at the exchange level, meaning purchases with an international seller may cost more if the buyer's currency sits at an unfavorable exchange rate.
• Translation risk occurs when a business operates in multiple jurisdictions, requiring parent companies to convert subsidiaries' financial information into their host country currency, potentially resulting in losses.
• Economic risk is dependent on larger factors, like global policy, supply chain health, inflation and beyond, causing fluctuation in exchange markets and requiring longer-term resolution.
The longer you exchange, the more adept you'll be at spotting how these risks take shape in your industry. Combating them isn't just a matter of experience, however. Explore hedging strategies, for example, to proactively manage potential downturns.
The trade war between the United States and Canada presents businesses with challenging conditions. Through it all, the loonie will fluctuate, and it's pragmatic to recognize the potential for recession. Over the next few months, it will be essential to continuously evaluate risks at play in the market and carefully plan for added volatility. Come what may, many Canadian business leaders are already responding, setting themselves up to be more than ready to address further developments well into the year.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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