The upside of the loonie’s slide

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For Plitron Manufacturing Inc., a Toronto company that makes transformers and sells more than 80 per cent of its products to the United States, the continued weakening of the Canadian dollar is a big bonus.

"It has a positive impact on companies like ours, who are exporters," said Plitron's vice-president of sales and operations Steve Nolan. The falling dollar "is definitely helping our bottom line."

Like many Canadian companies, Plitron put in place some natural hedges – such as buying materials and equipment from the United States – to dampen the impact when the Canadian dollar was soaring. Consequently, the benefits of a slipping dollar are muted somewhat. Still, "we still get a bigger benefit because the sales are bigger numbers than the purchases," Mr. Nolan said.

Plitron, and other companies that benefit from a lower dollar, may get more good news. The slumping Canadian currency, which hit its lowest level in more than three years at 93.98 cents (U.S.) Monday, is expected to fall even further as Canada's economy remains weak.

The dollar started the year at about par with its U.S. counterpart, but it has shed 6.7 per cent so far this year and is also weaker against the euro and the Swiss franc. Now at its lowest since the summer of 2010, the currency has fallen ahead of a Bank of Canada meeting Wednesday that is expected to show no hint of higher interest rates.

"There's been renewed focus [on] what the Bank of Canada will choose to do considering that inflation is below their control target of 1-to-3 per cent," said Camilla Sutton, head of currency strategy at Bank of Nova Scotia. "Because of that, it's likely we hear a fairly dovish-sounding Bank of Canada, and on the back of that the currency has weakened."

The dollar is also under pressure after several banks last week issued "sell" recommendations, she added. Traders shrugged off last Friday's report showing the economy grew at a quicker-than-expected 2.7 per cent in the third quarter. "It's very much tunnel vision on what the central bank might do," Ms. Sutton said.

She sees the Canadian currency weakening to about 92.5 cents by the middle of next year, before stabilizing and reversing course in the second half of 2014 as the U.S. economy picks up.

The big impact on the currency was the central bank's Oct. 23 shift into neutral stance, said Mark Chandler, head of Canadian fixed income and currency research at RBC Dominion Securities Inc. "That got us on the road to a weaker Canadian dollar," he said.

But it has been nudged further by several factors, Mr. Chandler added. A weaker-than-expected annual inflation reading of 0.7 per cent has raised the prospect of monetary policy easing – or interest rate cuts. At the same time, improving economies in the U.K. and parts of Europe are reducing the need for a safe haven – meaning Canada is no longer an essential place to park money. Mr. Chandler sees further weakness in the loonie, to about 92 cents in the coming months as the U.S. dollar strengthens.

Traditionally, exporters have always cheered a weaker loonie because it makes their products less expensive when sold in foreign markets, particularly in the United States.

But many companies were so spooked by the loonie's rise above par with the U.S. dollar that they put in place natural or formal hedges to gain some balance, and that will reduce their benefit as it falls.

Plitron investigated the possibility of setting up formal financial hedges, or buying copper futures to mitigate the price fluctuations of one of its key components, Mr. Nolan said, but the company decided not to jump into that complex game, instead opting for natural hedges in the form of U.S. purchases. Still, he is hoping for the loonie's slump to continue, while a move upward to anything above par "would really hurt."

Some companies have made dramatic adjustments to their operations to make sure that they'll get no whiplash from the dollar's movements, no matter which direction it goes.

Roger Hardy, chief executive officer of Vancouver-based contact lens marketer Coastal Contacts Inc., said his firm tries to price his products in local currencies, wherever they are sold. "We have tried to hedge to ensure that currency isn't a big factor in our business," he said. "We've minimized the impact."

Coastal has set up manufacturing and distribution centres in Canada, Europe, Australia and the United States, all of which keep the business in each of those countries in local currency.

Still, the drop in the dollar will have some impact. "It will make our U.S. sales number move up because we report in Canadian dollars," Mr. Hardy said. "But we are not a big story in regards [to currency impact]." He added that eight years ago, when the loonie was nearly at a 50-per-cent discount to the U.S. dollar, "it gave us a big advantage to be Canadian." But as the loonie rose "we tried to make sure that we hedged it out naturally."

Even the auto industry, with its intense export focus, has managed to adapt to the volatile dollar. The union representing workers at the Canadian plants of the Detroit Three auto makers agreed to adjust starting wages, and that has changed manufacturing expenses to such an extent that labour costs are just $2 higher in Canada – when the currencies are at par. The drop in the loonie to about 94 cents means labour costs now are lower here when measured in Canadian dollars. If the loonie declines further, the industry will be even more competitive.

With files from reporter Greg Keenan