Tuesday, October 2, 2007

Exchange Rates and the Stanley Cup

. Tuesday, October 2, 2007

On the eve of the new NHL season, I focus on two of my favorite things: hockey and exchange rates in order to consider how the U.S. dollar's recent slide against the Canadian dollar will shape competition in this season's NHL.

For those who do not follow pro hockey, Canadian teams have struggled with the triple (quadruple?) burden of being small market (and thus limited earnings), of playing a substantial share of their games in the U.S., and thus having to pay for many of their expenses in US dollars*, needing to pay salaries that are on par with those paid by American franchises, and finally, doing so with a currency that was weak relative to its southern namesake.

But now that the Canadian dollar has strengthened against the USD, Canadian franchises should enjoy a stronger bottom line--their USD dollar expenses will fall relative to their Canadian dollar earnings. Hence, they should be able to attract better players. One might expect, therefore, that Canadian teams will strengthen their rosters over the course of the season via trades and, by doing so, win the Cup. In short, US Dollar devalues, the U.S. exports its top hockey players to Canada. A Canadian team wins the Stanley Cup

Lest you think this silly, notice that the last time that a Canadian team won the Cup (the Montreal Canadiens in 1992-93) came at the tail end of the previous strong loonie era.

Admittedly, this exchange rate theory of Stanley Cup winners breaks down in the mid-1980s, a period that features a weak loonie and a dominant Edmonton Oilers team. Call this the Gretzky exception. But, as Gretzky is an outlier on every hockey dimension (they don't call him "the Great One" for nothing), I hardly think this anomaly undermines my theory.

Thus, I confidently predict that a Canadian team will win the cup this year. Which one? My money is on the Canadiens.

* note; players signed by teams based in Canada are paid in US dollars. Consequently, they reap the gains and suffer the losses from exchange rate movements. I wonder whether existing contracts adjust salaries to compensate for the historic "Canada premium" such that two players of equal value but playing on opposite sides of the border have the same purchasing power (i.e., lower USD contract for the Canadian team player; higher USD contract for the US team player). I also wonder whether this practice will change...


Matt said...

Interesting comments (though you're nutty to pick the Habs as the Canadian team of destiny).

I'm interested in this "Canada Premium" you refer to at the bottom. I've heard many times in the past of players wanting bigger contracts to play in Canada (to cover the extra income tax), and never of one taking a smaller one because it represented the same purchasing power.

Your main point is bang-on, though: every time the loonie jumps again relative to the USD (or even stays above the Cdn team's budget forecast), it's free money for the Cdn team... and if they're not already spending to the salary cap, then there's a good chance they'll use that free money to improve their team.

Thomas Oatley said...

Hi Matt--Maybe I am nutty to pick the Habs, but I grew up idolizing Ken Dryden, the pocket rocket, the Robinsons, Yvan, and the dynasty they had. I remember fuzzy black and white TV and Hockey Night in Canada from the old Forum. So, I guess I'm picking with my heart.

Interesting point about negotiating for the tax gap; hadn't thought about that. Seems reasonable that if players try to make up for that difference, management might try to account for the dollar difference.

Matt said...

Nutty I tells ya!!

At any rate, you've given me a good idea... it would be interesting to break down the advantages & disadvantages for various franchises and markets in the realm of government economic policy (or at least, it might be to my readers). There are a surprising amount of factors there.

Exchange Rates and the Stanley Cup
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