Question
A weak dollar can be a good thing for Canadian firms who want to sell goods in foreign markets. Because foreign products and services become
A weak dollar can be a good thing for Canadian firms who want to sell goods in foreign markets. Because foreign products and services become relatively more expensive, Canadian products and services become more competitive overseas. A stronger dollar allows those with Canadian dollars to buy more foreign goods, but Canadians exporters suffer because their goods become more expensive to foreigners.
Note that devaluation has also been accompanied by massive capital flight, as foreign investors pull their capital out of the country. This further exacerbates the economic impact of devaluation, as the closure of industries that were reliant on foreign capital increases unemployment and lowers economic growth, triggering a recession.
Suppose you are the CFO of a Canadian firm whose wholly owned subsidiary in Mexico manufactures component parts for your Canadian assembly operations. The subsidiary has been financed by bank borrowings from Canada. One of your analysts told you that the Mexican peso is expected to depreciate by 30% against the Canadian dollar on the foreign exchange markets over the next year. What actions, if any, should you take and why?
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