By Don Curren
It’s a new year, but small-and medium-sized enterprises (SMEs) in North America continue to confront a world of uncertainty.
SMEs are charting a course for 2020 with their vision being clouded by the specter of trade tensions with China, Brexit, the U.S. presidential election, the coronavirus outbreak, the potential for heightened conflict in the Middle East and supply chain disruption from unresolved issues with Indigenous peoples.
Yet despite those headwinds, a strong majority of financial decision-makers at SMEs remain optimistic. In a first-of-its-kind survey, Cambridge Global Payments found that 81 percent feel positive about the outlook for their business over the next six months.
The survey, commissioned by Cambridge and conducted independently by Leger, polled more than 500 senior financial decision-makers at SMEs in Canada and the U.S. Despite their contribution to the economy, SMEs haven’t typically been included in foreign exchange sentiment surveys in the past.
SME versus enterprise outlooks
The optimism among SMEs contrasts with their larger peers, whose sentiment slumped toward the end of 2019 due to uncertainties about trade policies, among other factors. That may result from the fact that SMEs tend to be less directly exposed to trade policy uncertainty than large corporations, which often have supply chains and operations that stretch across many jurisdictions. It also suggests SMEs might be more sensitive to the mood of consumers, as consumer confidence surveys were generally positive through 2019, although they have deteriorated recently.
Financial decision makers at SMEs also diverge from larger institutions in their expectations for foreign exchange (FX) currency volatility. Slightly more than half of survey respondents expect volatility to increase, while the expectations implied by options-market positioning forecast relative calm in 2020.
SMEs may be making a better forecast than option market players 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.
While many respondents expect the U.S. dollar to strengthen on a trade-weighted basis over the next six months, the survey showed SMEs aren’t as positive on the British pound relative to forecasters at financial institutions surveyed by Bloomberg.
This suggests SMEs are more worried about the impact of Brexit uncertainties on pound sterling than financial institutions. However, SMEs may be more optimistic on the pound following the election of a majority Conservative government in the U.K. late last year after the survey was done.
Trade issues and opportunities
Brexit itself, as it moves forward, is likely to have a disruptive impact on SMEs that have a trading relationship with companies in the United Kingdom.
However, Canadian SMEs have benefited from the CETA trade pact with the European Union, which has supported both exports to and imports from the customs union, and that trading relationship is likely to continue to expand without much disruption from Brexit.
Meanwhile, the removal of the residual uncertainty surrounding CUSMA is undoubtedly positive, although the treaty is broadly similar to its predecessor and isn’t likely to have a substantial impact on trade flows in North America. Longer-term, the health of the three economies in CUSMA will likely be a bigger factor in trading volumes between them than the adjustments to the trade deal.
Most respondents expect the Canadian dollar to remain stable against its U.S. counterpart over the next six months. SMEs should continue to take advantage of the integration of the North American economy and can use risk management strategies to help mitigate the risk stemming from adverse currency moves.
With the election cycle ramping up, it is perhaps unsurprising that 61 percent of respondents believe President Donald Trump and political uncertainty in the U.S. will be the biggest cause of volatility in foreign exchange markets.
In Canada, the ruling Liberals will introduce their first federal budget since losing majority government status in October’s election, one of the many un
certainties in what’s bound to be a tumultuous year.
The broad optimism among financial decision makers at SMEs is a good omen for the North American economy. But the mood could shift quickly considering the uncertainties for the issues discussed. With crosscurrents looming, it’s vital for SMEs to adopt a risk management strategy to weather any FX storm.
Don Curren is strategist, Cambridge Global Payments.