Most Canadian importers purchase goods and materials from the U.S. meaning most Canadian importers end up with U.S. dollar expenses. Given the ever-present unpredictability of currency exchange rates, it is important for businesses to protect expected USD payables from big, adverse dollar moves. This is especially important for businesses which hold their pricing for a long period of time (6 months to 2 years) or take delivery on imported products months after negotiating pricing with their vendors.  The amount of risk involved is directly tied to the length of time between entering an agreement with a supplier and the date the payment is made.

Foreign Exchange Test Case Scenario

Say a Canadian importer agrees to buy raw materials from a U.S. supplier in three months’ time for $100,000 USD. The current exchange rate is 1.3300, which means the importer’s cost would be equivalent to $133,000 CAD if the importer made the trade today.

The importer is locked into the U.S. dollar purchase price of $100,000, but since they do not actually pay the vendor for another three months, the final cost in Canadian dollars is still unknown.  If the U.S. to Canadian exchange rate is 1.3600 on the payment date, i.e. if the U.S. dollar appreciates by 3 cents, the total cost to the importer will have risen to $136,000 CAD – an additional $3,000 on top of their earlier estimate.

By agreeing on a price in U.S. dollars today but not making the payment until next quarter, the importer is at the mercy of financial markets for three whole months. Their costs rose by over 2% solely due to the exchange rate moving against them.

As you can see, exchange rates make cash flows and profit margins unpredictable and vulnerable. This can be a big source of pain for Canadian importers unless they plan accordingly. A currency protection strategy can reduce the negative impact of exchange rates.

However, some industries require price fluidity and would actually take on risk by protecting their currency value. For instance, a produce importer who has protected their USD payables at 1.3450 for the year is now susceptible to losing market share if the value of the U.S. dollar were to decrease. So how do you know if a currency protection strategy is right for you?

How You Can Make Smart Foreign Exchange Decisions For Your Business

Ask Yourself The Following Questions

  1. If the US dollar appreciated against the loonie by 10%, am I able to change my pricing with customers? Would this go over well?
  2. Am I able to confidently project USD payables in the medium to long term?
  3. Do I consider Foreign Exchange a profit center for my business? Is making Foreign Exchange gains important to me?

No one can accurately predict currency fluctuations in a short period of time, let alone the medium to long term. Bank or economist forecasts can be helpful in forming your own market view, but they are not reliable for budgeting or protecting you from adverse market moves. The U.S. dollar often fluctuates by 10% throughout the year; if the U.S. dollar appreciates 10% but your pricing is inflexible, you would be forced to accept the consequences on your bottom line.

Currency protection strategies help importers plan around something unpredictable: the uncertain value of a future invoice. But the best strategies align outcomes to the unique needs and risk profile of a business, whether that means limiting Foreign Exchange losses by protecting a known rate, making Foreign Exchange gains by taking advantage of favourable market moves, or both.

If you can accurately predict your payables in the medium to long term and are able to protect the exchange rate that you have budgeted for, why would you not choose to guarantee those profits? And take advantage of Foreign Exchange wins while you are at it?

Assistance With International Trade & Foreign Exchange

If you are interested in International trade, reach out to Pacific Customs Brokers for all of your Customs Brokerage needs for goods entering into Canada and the U.S., as well as all of your Freight Forwarding needs around the globe. If you need assistance with foreign currency exchange for your business, achieve more with EncoreFX. They will be able to provide expertise to your business on all matters regarding foreign exchange, international payments and risk management.

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Maria Mate
CCS, CTCS

While we strive for accuracy in all our communications, as the Importer of Record it is incumbent upon your company to ensure that you are aware of the requirements under the new regulations so that you maintain compliance as always.