TORONTO (Reuters) - Canadian exporters are holding off using their earnings to buy Canadian dollars or lock in hedges as the currency hits 12-year lows, betting it can weaken even further, foreign exchange dealers say.
The Canadian currency has plunged about 36 percent against the U.S. dollar since November 2007, hitting a low of C$1.4245, or 70.20 U.S. cents, on Monday. Most of that move has come since mid-2014, when the price of crude oil, one of Canada’s major exports, began its sharp sell-off.
In a sign of deteriorating sentiment, dealers say exporters who were waiting for the currency to cross C$1.40 now sense additional weakness is in store, given uncertainty about China, even lower crude oil and financial market volatility.
“Greed breeds inaction,” said Michael Goshko, corporate risk manager at Western Union Business Solutions.
The speed of the move has “pushed corporate Canada to the sidelines,” said Brad Schruder, director of foreign exchange at BMO Capital Markets.
Resource sector clients have scaled back hedging — bets to reduce their exposure — as the weaker Canadian dollar offsets the reduced value of the commodities they produce, according to George Davis, chief technical strategist at RBC Capital Markets.
Davis expects a move to between C$1.42 and C$1.45 to encourage more exporters to hedge.
But dealers warn that a near-term reversal in the currency could be followed by a burst of buying. Davis said a recovery toward C$1.3450 may spur a rush of orders from exporters who fear that the weakest levels have been missed.
Western Union’s Goshko also cautioned that exporters were taking a risk by holding off hedging.
“Can you imagine waking up one morning to discover the news that the Saudis do care about the price of crude oil?” he said.
Meanwhile, the Canadian dollar’s move has increased the cost of imported products, squeezing margins for retailers.
Importers that have hedges rolling off from last year are replacing them at a much lower rate on concerns the Canadian dollar could weaken further, according to Don Mikolich, executive director, foreign exchange sales at CIBC Capital Markets.
Some under-hedged companies have been scrambling “to protect margins from possible higher prices,” said Goshko, adding that others have been hanging on for a stronger Canadian dollar.
For many importers, it’s a case of seeing whether they can still be profitable at these levels for the currency, according to Darren Richardson, senior corporate dealer at CanadianForex.
Editing by Jeffrey Hodgson and Dan Grebler