Giving SMEs a Voice in Foreign Exchange

(This article originally appeared in the February edition of FEI Canada’s Finance and Accounting Review. To access it the original version, click here)

In many ways, small-to-medium enterprises are the Silent Majority of the business world.

They’re a critically important part of the economy. Data from both the US and Canada attest to that.

In the US, they create two-thirds of net new jobs and drive U.S. innovation and competitiveness and account for about 44% of U.S. economic activity. In Canada, they were responsible for slightly more than 50% of the value added to the country’s output, on average, between 2010 and 2014.

The World Bank says SMEs account for about 90% of businesses worldwide, are important contributors to job creation and global economic development, and represent than 50% of employment worldwide.

But their voice – and their perspective – often gets lost. They simply don’t have the resources to make their voices heard to same extent as their bigger corporate brethren.

Yes, they have advocacy groups and associations to communicate their concerns and perspectives. But large corporations tend to have a higher profile. That’s partly a reflection of their size, but it also reflects their greater capacity to advocate for their points of view through their communications and public relations channels.

One area where the concerns and perspectives of SMEs go largely unheard is the world of foreign exchange.

Foreign exchange markets are awash in commentaries and forecasts from global banks and financial institutions, and the surveys produced by financial news agencies and other market watchers concentrate exclusively on their views and forecasts while the perspectives of SMEs go unheard.

But SMEs are as inextricably caught up in the global economy as larger corporations and institutions. According to Statistics Canada, SMEs accounted for 97.4% of the more than 48,000 Canadian establishments that exported goods in 2017

So clearly, they have something to say about foreign exchange markets, the essential gateway to trade and the global economy.

To find out what SMEs in Canada and the US are thinking about foreign exchange, Cambridge Global Payments late last year launched a first-of-its-kind annual survey of CFOs and other financial decisionmakers at small-to-medium enterprises in the US and Canada in conjunction with the well-known polling and market research firm Leger.

The online survey of 521 senior financial decision makers who work for North American companies with an annual revenue between $5M and $250M was completed between November 7 to 21, 2019, using Leger’s online panel. The margin of error for this study was +/-4.3%, 19 times out of 20.

The results of the first survey show their views diverge significantly from those of large financial institutions and other key participants foreign exchange market in some significant areas.

Survey respondents showed a surprising degree of optimism regarding the economic outlook. While sentiment surveys suggested larger businesses had suffered a dip in confidence due to uncertainties about trade policies, Corpay’s survey found 81% of financial decisionmakers in some businesses feel positive about the outlook over the next six months.

About 19% of survey respondents expect the US dollar to trade at or below 1.29 against its Canadian counterpart halfway through 2020, below the 1.31 consensus forecast prepared by Bloomberg. Roughly 18% see the US dollar trading in the 1.29 to 1.32 range against the Canadian dollar, which encompasses the consensus forecast. Fully 21% see the US dollar trading above the consensus level.

Survey respondents’ expectations for the British pound depart significantly from the Bloomberg consensus forecast level of 1.3300 at the end of June next year. Only 6% of respondents expect the British pound will reach that, and a total of 48% expect the pound to be at or below 1.30 at that time.

Over half (55%) believe the overall forex volatility will increase in the next six months, with roughly 28% believing that overall forex volatility will remain stable, while only 10% believe it will decrease.

SMEs may be making a better forecast than option markets in this case, since periods of constrained volatility as seen recently in currency markets are usually followed by sharp increases in volatility. Nonetheless, a significant share of the SME sector isn’t positioned for such an increase and may not be adequately prepared for a return to more volatile conditions.

Almost two-thirds of respondents (61%) overall think the factor that will have the most impact on FX markets is Donald Trump and U.S. political uncertainty, particularly financial Canadian decision makers (70%) compared to those in the U.S. (58%) It’s important to recall, in this particular context, that the survey was taken in mid-November. The rapid succession of high-impact events since then suggests that may have changed in the meantime.