What Your Bank And Weatherman Have In Common

THOSE WHO HAVE knowledge don’t predict; those who predict don’t have knowledge. Lao Tzu

The only thing more unreliable than a weatherman predicting the weather is a bank predicting the Canadian Dollar. The recent wild deviations in the Loonie have added to the multitude of external factors directly impacting the financial performance of many Canadian companies. Business leaders have been led to believe that relying on inaccurate bank forecasts is an effective way to manage currency risk. Other than providing a false sense of security, it has been a largely ineffective “strategy”.

If we look back to 2021, no bank forecast USD/CAD would trade above 1.30, and USD/CAD subsequently traded as high as 1.37. Despite this nearly 40% miscalculation, the perception of the Loonie being a stable predictable currency remains the same.

The reality is that the average volatility of USD/CAD over the last 10 years has been around 12%. However, the current climate of high inflation, rising interest rates and a stalled economy is making it increasingly difficult for businesses to absorb the potential negative impacts. While companies selling to the US have been winning more business without understanding that their pricing edge might evaporate if we were to return to the historical average of 1.25.

“A rising tide floats all boats….. Only when the tide goes out do you learn who has been swimming naked.” Warren Buffet

In an interview with Toronto based James Campbell, a senior partner of Alpha Group, an international juggernaut that managed $30 billion in currency trading volume in 50 different countries.

“This issue is not unique to Canada, it’s a constant concern all around the world. But unfortunately tends to be a common thread is the fact that the issue of currency risk doesn’t tend to expose itself until it’s too late. Or trying to buy fire insurance when your house is on fire.” James Campbell.

Having experienced this firsthand myself in one of my businesses that primarily dealt in the US, currency, at the end of the day became the determining factor of winning or losing. And of course, I’ve been trying to learn from my life lessons. A little bit of research determined this is far more manageable and preventable than most realize, if they’ve yet come to terms with having the problem in the first place.

Companies like Alpha Group, specialise in developing bespoke currency risk management solutions for small to medium sized businesses. Alpha’s simple but effective solutions reduce volatility by around 75%, enabling businesses to focus on their core competencies, rather than gambling on the currency markets.

“Even for businesses that are sensitive to currency issues, many companies approach the currency issue as trying to bet for or against. This is a slippery slope with some potential serious negative outcome. The goal here is to manage the risk”. James Campbell.

Unfortunately they can’t change the volatility in the Canadian weather; metaphorically speaking, but It just might smooth out the 70-degree swings between seasons where you might find yourself standing in a snowstorm in shorts and a tank top.