What a declining Canadian dollar means for the Ottawa Senators

As the Canadian dollar continues to fall, concern is rising among NHL fans, media and (as much as they will not admit it) NHL executives. Right now, the dollar sits at $0.78 US dollars (USD), its lowest point since the economic recession of 2008-09. Canadian hockey fans have a lot of questions about how this will affect their team. So, we wanted to look at the potential implications for the Ottawa Senators.

When the Canadian dollar falls, Canadian hockey teams inevitably suffer some financial strain. The NHL does business (i.e. pays players) in US dollars, but seven of its teams make money in Canadian dollars. So when $1 CAD = $0.78 USD, things get a little tight for Canadian teams.

For big-money teams like Toronto or Montreal, their profit margins decline a bit, but they are ultimately going to be fine. It's the smaller-market teams like Ottawa and Winnipeg who stand to lose the most in this situation.

Fortunately, Canadian hockey teams participate in what's known as currency hedging to protect themselves from the fluctuating dollar. Think of it as an insurance policy that limits the impact of foreign currency exchange rates for organizations. But when the dollar falls this fast, as it has been lately, it gets harder for these teams to protect themselves. There is only so much that currency hedging can do.

The NHL salary cap will also face the effects of a declining Canadian dollar. Gary Bettman said last month that he expects the salary cap to increase 5.8 per cent to $73 million after this season. While this is the smallest cap increase since 2010, it's looking less likely that this is going to happen. This increase assumes that the Canadian dollar will sit at $0.88 USD, meaning it will have to rise 10 cents in the next five months. At its current rate, this is highly unlikely. If the Canadian dollar finishes the NHL season at 84 cents instead of 88, it could mean a loss of more than $60 million in revenue for the league. Needless to say, the NHL and the cap are both highly dependent on what happens to the Canadian dollar in the next few months.

Here are some of the cap possibilities depending on the value of the Canadian dollar:

Information courtesy of ESPN.com.

This expected increase in the salary cap includes the five per cent escalator/inflator, which the NHLPA can refuse if it fears growing escrow costs for its players. Escrow costs often increase with a low Canadian dollar. In this case, the cap would sit at $68.4 million instead of $73 million.

To put things in perspective, here is a look at rate increases for the NHL salary cap over recent years (note the dramatic drop after the 2008 market decline):

Chart courtesy of Puck Daddy.

Even if the cap rises, but at a lower rate than expected, many teams (Canadian or not) sitting at or near the cap ceiling stand to lose quite a bit. There are a number of teams who have signed players assuming that the cap will increase to at least $73 million, such as the Chicago Blackhawks. Should the cap not increase to this amount, these teams will have some difficult personnel decisions to make.

Where does Ottawa stand in all of this? Obviously, the Sens are at risk with a falling Canadian dollar, as they are a Canadian team. But amid the potential financial strain, there is a silver lining. As the higher-paying teams may be forced to rid themselves of certain players to stay under the cap, lower-paying teams will swoop in to clean up the mess. The Sens, or other teams in their situation, could potentially get some big-name players (or good depth players) at a reduced rate, with so many teams desperate to get rid of them. Of course, this is assuming that the Senators' internal budget doesn't get in the way. The impact of the dollar on the Sens' internal budget is yet to be determined.

At the end of the day, no one knows where the Canadian dollar will be at the end of this season. Analysts expect it to continue to fall in the coming weeks, but who knows where it will go from there. This is a situation that Sens, and NHL, fans should continue to monitor closely.