{"id":63,"date":"2024-12-18T13:07:20","date_gmt":"2024-12-18T13:07:20","guid":{"rendered":"https:\/\/d-riskfx.com\/?p=63"},"modified":"2025-04-29T13:05:53","modified_gmt":"2025-04-29T13:05:53","slug":"crisis-currency-risk-covid-response","status":"publish","type":"post","link":"https:\/\/d-riskfx.com\/en\/crise-et-risque-de-change-coronavirus-quoi-faire\/","title":{"rendered":"Crisis and Currency Risk: Coronavirus \u2013 What Now?"},"content":{"rendered":"

August 19, 2022<\/em><\/p>\r\n\r\n\r\n\r\n

Coronavirus will change how we operate for years to come.<\/p>\r\n\r\n\r\n\r\n

COVID-19 and Currency Risk Management<\/strong><\/h2>\r\n\r\n\r\n\r\n

Without a vaccine or remedy for COVID-19, any rebound in economic activity can be abruptly halted again. It is therefore crucial to learn the hard lessons from the first wave and integrate long-term changes into business and operating models to make them more resilient. This is especially true in the context of\u00a0crisis and currency risk<\/strong><\/a>, where currency fluctuations driven by global uncertainty can severely impact internationally active businesses.<\/p>\r\n\r\n\r\n\r\n

First, it\u2019s essential to determine exactly where and how the crisis has impacted your existing models and, consequently, where the risks and opportunities lie within your value creation ecosystem. This allows companies to react swiftly to the inevitable changes we will continue to face in this unstable environment over the coming months.<\/p>\r\n\r\n\r\n\r\n

The term \"new normal\" has been widely used recently. In the context of risk management, this \"new normal\" simply means we will continue to face extreme risk scenarios (\u201cTail Risk\u201d) for some time.<\/p>\r\n\r\n\r\n\r\n

The Current Environment Breeds Volatility<\/strong><\/h2>\r\n\r\n\r\n\r\n

Trade wars between the U.S. and major economies, the oil price crash following the Russia\/Saudi Arabia dispute, Canada\u2019s rail blockades, and now a powerful exogenous shock like the coronavirus. Even with less, markets would have struggled.<\/p>\r\n\r\n\r\n\r\n

In just a few days, we witnessed a complete reversal of economic and monetary policy. Central banks are back in emergency mode, while governments are scrambling to fund struggling sectors.<\/p>\r\n\r\n\r\n\r\n

They must inject all the liquidity needed to prevent otherwise healthy businesses from going bankrupt. Interest rates are slashed across the board, and money supply is being expanded. The U.S. Federal Reserve has established currency swap lines with several central banks to ensure U.S. dollar availability and avoid an excessive appreciation of the global reserve currency.<\/p>\r\n\r\n\r\n\r\n

The Coronavirus<\/strong><\/h3>\r\n\r\n\r\n\r\n

Hygiene is now everyone\u2019s focus. This pandemic is unprecedented in the type of uncertainty it generates and the associated social and economic impact. The closest comparison is the 2003 SARS outbreak, when risk aversion among investors led to sharp market declines.<\/p>\r\n\r\n\r\n\r\n

However, the scale of this outbreak is far greater in both geographic reach and transmission. The truth is, no one knows the full scope of the problem. Markets hate uncertainty.<\/p>\r\n\r\n\r\n\r\n

In short, governments still don\u2019t know how widespread the virus is across America (and globally), and containment will take time. Widespread testing, quarantines, and \u201csocial distancing\u201d have proven effective in curbing new cases, as seen in Hong Kong and South Korea.<\/p>\r\n\r\n\r\n\r\n

The Impact on Currencies<\/strong><\/h2>\r\n\r\n\r\n\r\n

Large parts of the economy\u2014workplaces, schools, sports leagues, cultural venues, restaurants, gyms, retail\u2014remain closed or severely restricted. A social safety net, even if temporary, is essential for people and businesses to pay their bills and sustain consumption. Social distancing will remain for a while. A recession is inevitable.<\/p>\r\n\r\n\r\n\r\n

The Legacy<\/strong><\/h3>\r\n\r\n\r\n\r\n

Every economic shock leaves a legacy. This time, it\u2019s a public health crisis shaking the global economy. What kind of legacy can we expect?<\/p>\r\n\r\n\r\n\r\n

Healthcare systems will be reorganized quickly, with more basic consultations shifting online to avoid infection risk in overcrowded clinics. Governments are likely to increase healthcare spending to prevent future crises from becoming as costly. Wealthier nations will need to help poorer ones. Fiscal deficits will widen.<\/p>\r\n\r\n\r\n\r\n

Consumers will increasingly shop online, and remote work will gain ground among white-collar workers.<\/p>\r\n\r\n\r\n\r\n

New regulations may enforce stricter cleaning standards in businesses, tighter border controls, expanded insurance coverage, and restructured travel logistics for both people and goods.<\/p>\r\n\r\n\r\n\r\n

Global supply chains will undoubtedly be reconsidered, and business strategies will shift accordingly. This crisis once again highlights the risk of relying on a single supplier or manufacturing base\u2014China, for instance.<\/p>\r\n\r\n\r\n\r\n

The tradeoff between short-term efficiency (value creation) and long-term resilience will need rethinking. The \u201cjust-in-time\u201d manufacturing approach is vulnerable to supply chain shocks and threatens long-term sustainability\u2014a newly revealed \u201cblack swan.\u201d<\/p>\r\n\r\n\r\n\r\n

These changes will have lasting effects on production and distribution processes. Simplifying supply chains (e.g., sourcing components within Canada or North America) may eventually boost the Canadian economy, though it requires time and investment.<\/p>\r\n\r\n\r\n\r\n

This list is far from exhaustive. The microeconomic impact of these adjustments will persist well beyond COVID-19. Hopefully, once the outbreak is contained\u2014though not anytime soon\u2014market values will begin to recover.<\/p>\r\n\r\n\r\n\r\n

The Effects of a Strong U.S. Dollar<\/strong><\/h3>\r\n\r\n\r\n\r\n

In the meantime, the U.S. dollar is gaining strength against all other currencies. Let\u2019s remember: large moves in the reserve currency can send shockwaves through the global economy, especially for countries and companies with U.S.-denominated debt.<\/p>\r\n\r\n\r\n\r\n

Moreover, in dollar terms, this appreciation leads to a decrease in global money supply, which conflicts with the need for more accommodative global monetary policy. That\u2019s why central banks are intervening aggressively\u2014to inject liquidity and expand money supply.<\/p>\r\n\r\n\r\n\r\n

A strong U.S. dollar pushes the Canadian dollar down by 10 to 15 cents, jumping from 1.30 to 1.45 CAD\/USD. The stability of exchange rates will be under great pressure in the coming months. Increased frequency and amplitude in currency movements are expected.<\/p>\r\n\r\n\r\n\r\n

This depreciation offers Canadian exporters a significant pricing advantage\u2014if they can find buyers across the border and have enough inventory to meet demand.<\/p>\r\n\r\n\r\n\r\n

Navigating the Current Storm\u00a0<\/strong><\/h2>\r\n\r\n\r\n\r\n

Identify Major Costs and Revenues<\/strong><\/h3>\r\n\r\n\r\n\r\n

If the goods you produce include imported components (assuming you can still obtain them), a weaker loonie\u2019s benefit is offset by rising production costs.<\/p>\r\n\r\n\r\n\r\n

Also, if you\u2019re new to this market, time and investment are needed to establish logistics, develop clientele, and build customer relationships. The currency advantage may be gone by the time your product reaches the market.<\/p>\r\n\r\n\r\n\r\n

A weak Canadian dollar helps manufacturers\u2014but the reality is nuanced, with both pros and cons. Dissect these impacts to benefit from them.<\/p>\r\n\r\n\r\n\r\n

Contact New Suppliers<\/strong><\/h3>\r\n\r\n\r\n\r\n

Managing currency risk reactively is difficult. That\u2019s why a clear policy that removes emotion from decision-making is essential.<\/p>\r\n\r\n\r\n\r\n

The rapid fall of the loonie created potentially favorable conditions for Canadian manufacturers. But risks persist, and identifying and mitigating them is the best path to business continuity.<\/p>\r\n\r\n\r\n\r\n

This is why companies must approach financial markets with preparation, not reaction. That\u2019s the very purpose of a currency risk policy. FX risk management must be repositioned at the heart of operations\u2014where risk enters, transforms, and exits the business.<\/p>\r\n\r\n\r\n\r\n

Explore Currency Pass-Through Strategies<\/strong><\/h3>\r\n\r\n\r\n\r\n

At the entry point, you manage margins and cash flows; at the exit, competitiveness and client relationships. Currency risk is complex, often invisible in financial statements, yet its impact is swift and unpredictable.<\/p>\r\n\r\n\r\n\r\n

Align Your FX Position with Business Cycles<\/strong><\/h3>\r\n\r\n\r\n\r\n

This organized approach protects against adverse currency movements while preserving operational flexibility. It helps reduce exposure to short-term trends and smooths currency impacts over the long term.<\/p>\r\n\r\n\r\n\r\n

Proper risk management takes weeks and involves both internal and external resources\u2014but it pays off quickly.<\/p>\r\n\r\n\r\n\r\n

What to Do Right Now?<\/strong><\/h2>\r\n\r\n\r\n\r\n

Here are a few suggestions to weather the current crisis:<\/p>\r\n\r\n\r\n\r\n

A) Identify Major Costs and Revenues Over the Next 12 Months<\/strong><\/h3>\r\n\r\n\r\n\r\n