Foreign exchange investors have been hit hard by the global financial crisis.
Now, they’re facing another crisis: the collapse in oil prices.
In Canada, foreign exchange investment (FII) is one of the country’s largest and fastest-growing sectors, accounting for about 25 per cent of GDP.
For foreign-exchange investors, the economic fallout has been devastating.
Some have lost hundreds of thousands of dollars.
Some are bankrupted.
And some have gone bankrupt.
But in a sign of how badly the downturn has hit the sector, some of Canada’s largest foreign exchange traders are moving back to Canada.
“The oil price crash has really hit foreign exchange trading, but I think there are still some of the big guys that are staying,” says Tim Crouch, a former chief executive officer at the Canadian Bankers Association (CBA).
“The Canadian Banker’s Association is not an oil-and-gas business.
So there are people who are really doing very well.”
FII is one sector that has struggled the most.
The Canadian Bank Association’s recent report on the foreign exchange industry found that “only 12 per cent (of Canadian FII) trades are at or below the threshold for an oil company.”
The rest are either trading at a loss or selling at a discount.
“There’s not a lot of money being made in foreign exchange,” says Mark St-Arnaud, a professor of finance at Dalhousie University.
“In fact, they are seeing some of their profits drop.”
Firms have been scrambling to find a way to survive in an increasingly volatile market.
“We have to understand where the next crisis might come from, and how to deal with it,” says Paul Johnson, a vice-president at the Bank of Montreal.
Foreign exchange trading in Canada peaked in 2010, and the downturn accelerated in 2013.
Foreign exchanges were up 9 per cent in 2016, and another 4 per cent the following year.
At the start of this year, FII was up 13 per cent.
The slump in oil has led to the collapse of many foreign exchange companies, including a handful of major ones, such as Royal Bank of Canada and TD Bank.
Foreign-exchangers have been struggling to keep up with demand.
Firms in foreign countries, like China, India and Brazil, have been buying Canadian dollars for their foreign-currency trading needs.
Some foreign-dollar trading companies are struggling to cope with the increased volume.
“They have been very aggressive in their buying,” says Crouch.
“It’s not something that they are willing to be on their own.”
FIVI was also up 15 per cent, while FIIX was down 3 per cent last year.
The oil price slump also hit other sectors of the industry, including commodities, financial services and property.
“As the market has been impacted by the financial crisis, FIVIs are seeing a decline in activity and investment,” says John Coughlin, a financial analyst with Bank of Nova Scotia.
“This is particularly the case for commodities trading, which was also a strong sector last year.”
The downturn also hit FIIE, which includes brokerages and investment banks.
Some brokers are also selling some of what they had to the stock market.
The industry has seen a sharp drop in revenue, as companies have been forced to raise wages and cut jobs.
“For the most part, brokers are making money, but it’s not enough to sustain their businesses,” says David J. Macdonald, managing director at Toronto-based financial consulting firm Munk Associates.
“A lot of people are having to sell assets.”
For FIIe, there are a number of options.
The company has been cutting costs, like laying off people, and raising prices to compensate.
For investors, it’s possible to sell stocks, or hedge against future drops in the market price of a company’s shares.
And it’s easy to do.
“Investors who are looking to hedge against a drop in the price of the company’s stock may be able to do so by selling a portion of their holdings in the company,” says J. Michael Coyle, a Toronto-area lawyer and managing partner of the law firm JMC Partners.
“These transactions are not prohibited by law, and they are legal.”
The big firms that have been most affected by the market downturn include TD Bank and RBC, the countrys largest mortgage lender.
TD is also considering selling some assets in its Canada operations.
RBC has been buying up Canadian shares, which it plans to sell for about $40-million, says John Foulkes, TD’s chief financial officer.
It’s also possible for firms to sell bonds.
But the Canadian government is looking into how to help the sector.
It has asked the Bank to review the foreign-reserve system and help facilitate the sale of securities in foreign markets, says Dominic LeBlanc, a spokesman for Foreign Affairs Minister Ch