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The Mighty Loonie

By Mike Monsen, CanadianForex

Canadians have borne witness to an astonishing surge of strength in the almighty Loonie over the past year! Raising commodity prices, particularly oil and gold accompanied by fundamental weaknesses in the US economy have made for a record-breaking year. In fact, earlier this month the US dollar hit a 130-year low vs. the Canadian when it reached CAD$0.9056¹.

To be sure, uncertainty is prevalent within the US economy and the current levels of USD/CAD, and picking the best time to place your bets can be a bit of a shot in the dark. Most companies will express a view of where they believe the markets will go. Even so, we know that the markets cannot be predicted with certainty. On an average day in the foreign exchange markets some USD$3.2 trillion worth of transactions are initiated by thousands of major market makers globally!² Not one major financial body in the world forecasted the precipitous fall of the US dollar to the depths of CAD$0.90 in 2007. Not one.

So when I have decided to make a purchase that involves a foreign currency, how can I protect the price from fluctuating currency markets?

A simple way to do this is by using a forward exchange contracts (FEC). An FEC can remove the risk of market fluctuation as well as ensure a viable purchase. This will allow you to lock in the rate of exchange until you are ready to pay for your purchase at some point in the future. You will be required to furnish a 5% deposit, with the further 95% required upon the transfer of the full amount of your funds at a future date. If the rate of exchange changes over the duration of the contract you will not be affected and the price of your purchase will remain constant.

Another worthwhile tool to consider when making a foreign currency purchase is the use of limit orders. This is an order to purchase foreign currency at a rate that is better than currently offered. These orders can prove very useful in today's volatile markets where we have seen fluctuations over 2.73% in one day!

How do I decide where to buy my currency?

Most people think that they must use their bank to buy foreign currency and transfer funds. Typically currency specialists can offer much better rates of exchange and lower fees then banks charge. Several things to consider when looking for a currency provider:

• Are you being offered a competitive rate of exchange?
• What are the fees involved with the transfer? Wire fees? Commission fees?
• Can your provider offer the level of service you require?

Before you make a purchase that involves foreign currency do the math. What are the exchange rates today? Is this affordable and are you happy with that price? If not, at what exchange rate would you be happy with the transaction? Remember, it is important to work in conjunction with your currency expert when evaluating appropriate strategies to protect your purchase against currency risks.

About the Author

Mike Monsen joined CanadianForex as a Business Development Manager in July 2007. CanadianForex is a subsidiary of Ozforex, the leading provider of foreign exchange services for private and corporate clients globally, operating dealing rooms in Sydney, London and Toronto. Mike graduated from Brock University in 2003 with his Bachelor of Business Administration (Hons), Concentration in Finance. Prior to joining CanadianForex he worked for a multinational foreign exchange firm as a Risk Management Sales Consultant within the North America market.

1. http://www.scotiafx.com/Chart_Feed/Wklyoutlook.pdf
2. http://www.bis.org/triennial.htm