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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.
The majority of companies that made use of financial hedging were reported to prefer the simpler structure of an option, in which they gain the right to sell or buy Canadian dollars at an agreed price at some future time.
However, some new trends emerged in 2007. More firms were engaging in more complex strategies that were tailor-made to address their particular exposure, there was more use of participatory option structures and, for the first time, commodity producers were reportedly interested in hedging due to the sporadic outperformance of the currency.
The banks that participated in the survey were Bank of America, Bank of Montreal, CIBC World Markets, HSBC (Canada), JPMorgan Chase (Canada), National Bank of Canada, RBC Capital Markets, Bank of Nova Scotia, Societe Generale (Canada), State Street (Canada), and Toronto-Dominion Bank.
Reporting by Louise Egan; Editing by Rob Wilson