loonies

The loonie hasn’t been flying that high of late. Over the last 18 months, the Canadian dollar has seen a quarter of its value wiped out against the U.S. dollar.

What has this done to the IT sector north of the border?

The Canadian dollar’s fall against U.S. currency began in July 2014, when it stood at around 0.938. Since then, its fall has been steady and relentless, save for a bounce last April. It reached its lowest point in early January, limping in at 0.696, and has enjoyed a modest rise in the last couple of weeks as oil prices pulled back from their downward slide.

 

The loonie's value over the past 18 months. How low can it go? Image courtesy OANDA.
The loonie’s value over the past 18 months. How low can it go? Image courtesy OANDA.

The situation may have improved consumer spending in Canada, but that’s because retailers aren’t going to the U.S. to spend their dollars. CIOs didn’t have that luxury anyway, and Robert Simon, managing partner of the IT Venture Fund at BDC Capital, believes that will have an effect on their buying power.

“To the extent that they’re buying equipment or services in [U.S.] dollars, it’s a lot more expensive for them,” he said. There’s an upside, though: “It might accelerate their migration to the cloud.”

CIOs facing the prospect of increased capital expenditure may decide to take the plunge and buy into an opex model, where they don’t have to pay more money up front for increasingly expensive equipment.

If they choose to host their applications with U.S. firms, such as Amazon, then that could cost them more, but there’s also an opportunity to host with domestic providers and drive costs further down, he suggested.

IT firms in Canada can take comfort from a lower loonie, said John Reid, president and CEO of the Canadian Advanced Technology Alliance (CATA). They can get the best of both worlds when the domestic dollar drops significantly lower than the greenback.

“A low loonie enables Canadian firms to generate added revenues in the U.S. marketplace while enjoying lower overhead expense levels in Canada. Our dollar goes further with a boost to profit margins for Canadian tech firms,” he said.

This is particularly true in industries such as near shoring. U.S. companies often choose to use Canadian IT firms to manage outsourced business processes and project-based tasks such as software development. A lower Canadian dollar enables them to get a great return on their expenditures, explained Simon.

Happy times for venture funding

So, CIOs across all sectors can find some good in the falling Canadian dollar. IT service providers in Canada also stand to benefit, say experts.

“Investing in Canada, including innovative start-ups and growth capital hungry firms is more and more attractive. Canadian assets are effectively discounted when compared to their U.S. counterparts,” said CATA’s Reid. That can have an effect on venture funding, because U.S. firms can get a bigger bang for their buck when taking on Canadian investments.

This stimulus can be useful, but it can also create problems if it goes on for too long, warned Simon, whose employer just launched its second venture fund in Canada for mid-stage tech startups, bringing $150m to the market. This M&A frenzy hasn’t happened yet in the tech sector, but there’s a chance that tech startups in Canada may be acquired by U.S. firms on the lookout for a bargain. Many U.S. firms tend to see acquisition as a viable exit strategy, instead of toughing it out all the way through to an IPO.

The loonie’s fall brings a mixture of effects, then, depending on whether you’re an IT customer, a service provider, or a tech company looking for funding. Having a strategy to cope with it is important, if, as some have said, it reaches a historical low by the end of this year, and stays low for a lengthy period thereafter.



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