More of corporate Canada seen hurt by loonie in 2007

Mon Jan 7, 2008 4:56pm EST
 
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OTTAWA (Reuters) - Canadian banks expected almost one-third of their corporate clients to be badly hurt by the strong Canadian dollar in 2007, up from one-quarter in 2006, a Bank of Canada survey showed on Monday.

The central bank conducted its annual survey of eleven banks in May and June 2007, prior to the currency's dramatic rise to parity with the U.S. dollar, and beyond.

The questionnaire asked banks about the degree of foreign exchange hedging by their corporate clients in order to better understand how heavily companies rely on financial market instruments, as opposed to so-called natural hedges, to prevent currency movements from harming their earnings.

The survey also found a small increase in the percentage of companies the banks believe benefited from the currency's appreciation, particularly importers and commodity producers.

"Many banks noted that they have been impressed by the resilience shown by the Canadian economy as a whole over the course of the last five years in the wake of the large appreciation of the currency since 2002," the Bank of Canada said in a statement.

Much to the alarm of exporters and manufacturers, the Canadian dollar appreciated 17 percent in 2007 and hit a modern-day high just above US$1.10 on November 7, before backtracking. On Monday afternoon, the currency was at C$1.0054 to the U.S. dollar, or 99.46 U.S. cents.

The main factor helping companies withstand the shock of the dramatic currency appreciation was strong commodity prices, which acted as a natural hedge, the survey respondents said.

Overall, there was a decline in the degree of financial hedge coverage and the average term of hedges compared to previous years.

"This was often associated with exporting firms that were experiencing negative currency effects from the stronger Canadian dollar, but that were unwilling to lock in the exchange rate at current levels," the bank said.   Continued...

 
<p>A Canadian one dollar coin is shown in Montreal, April 28, 2006. Canadian banks expected almost one-third of their corporate clients to be badly hurt by the strong Canadian dollar in 2007, up from one-quarter in 2006, a Bank of Canada survey showed on Monday. REUTERS/Shaun Best</p>