Will the US Dollar Sink the Salary Cap?

For those who follow the goings on in the financial markets closely, the recent rally in the US Dollar in terms of the trade-weighted index was quite an event, considering the extreme weakness of world's reserve currency over the past 7 years. The blast upwards to 76 on the index has some people proclaiming (and I'm not one of them, mind you) that the Bear Market in the dollar is over:

"This is the watershed week for the US dollar," said Marc Chandler, currency strategist at Brown Brothers Harriman. "The magnitude of the dollar's moves and the breaking of key technical levels suggest that a major shift in the outlook towards the dollar is occurring as massive positions are adjusted." Other analysts described the widespread buying of dollars as "capitulation"

One might be wondering what this has to do with the NHL, and, as the title of this post suggests, the salary cap? Allow me to build my case slowly if you would. Considering that according to this article in the Toronto Star I found at this post by my old blogging buddy the EclectEcon over at the Sportseconomist.com, the driving force behind the >10% rise in the salary cap for each of the past two seasons was the strengthening Canadian Dollar:

The increase in the value of the Canadian dollar may be responsible for as much as half of the league's revenue gains since the NHL went through the lockout of 2004-05, say several sources familiar with NHL finances.

"If you take out the Canadian teams, which have done so well since the lockout largely because of the Canadian dollar, the league's revenues are actually only growing at a 2 per cent clip per year," says an executive with a U.S.-based NHL team, who requested anonymity.

With the Loonie averaging near parity with the $USD over the past year and having broken down out of the box formation that held it in check between $1.02 and $0.97US for the past 9 months to its closing price as of this writing to $0.938, there is a real possibility of a contraction in league revenues due to this breakdown of the exchange rate.

I'm not sure an actual contraction in revenues is in the cards, but with the near collapse of the construction economy in the States of Arizona and Florida I would not put any of my money down on that bet either. Considering the spending spree that the teams have engaged in during this off-season and that the mid-point of the salary range is the targeted percentage of revenues due the players as total salary compensation, I can almost assure you that in this last year of this CBA the players should be absolutely prepared to kiss a significant portion of their 15% escrow payments goodbye.

Looking at the latest payroll numbers for the players signed by all 30 teams, the total salary committed is $1.508 billion USD, or 58.9% of last year's revenues of $2.56 billion USD. That figure includes the LA Kings being considerably under the salary floor by a wide margin and a few teams being above the cap by a few million USD. If the players are due 56% of revenues, then total revenues must rise to $2.691 billion USD, or by 5%, for the players to get 100% of their contracted salaries. As The Mirtle pointed out when the Star article when live, the Cando averaged $1.007 USD during Oct. 07 to Apr 08, a full 14% increase over the same period the year previous. If the exchange rate collapse continues into the fall and the Canadian Dollar trades as low as $0.90, the likelihood of reaching those revenue projections is doubtful at best.

In a sense, the NHL is at the mercy (like all of us, really) of the dominant monetary powers in the world. If the US Dollar had collapsed below the 71-72 area, it may have gone into another free-fall to the low 60's, which would have triggered a world-wide panic in the financial markets as foreign Central Banks off-loaded their US Treasury debt in a disorderly manner. If there is one thing you can count on with bankers though, they don't like things disorderly. So, even a US Dollar grizzly bear like me has to admit that they would put in at least one solid stand against that chaotic outcome. Hence, the corrections in gold, oil, grains and base metals from overbought positions and the simultaneous jump in the dollar.

There is tremendous weakness in a number of the NHL's US markets and if the Loonie is not there to help prop them up by repatriating Canadian Petro-Dollars via revenue sharing, I don't really see how they can survive in an age of dollar strength. It's ironic, after all, that at the turn of the millennium it was the over-valued dollar that nearly bankrupted the smaller Canadian franchises like Edmonton and Calgary while the US housing boom (Greenspan's final act in his 20 year Bubble Blowing Bonanza) propped up marginal hockey towns like Phoenix and Miami. Now, these teams are dependent on increasing injections of revenue sharing (liquidity) from those Canadian teams to have even the illusion of prosperity. This is very similar to the our foreign creditors funding the US Treasury's Current Account Deficit and the minute the stop doing so, the party ends rudely.

In case you're shaking your head over just how much of a geek I am for this stuff, rest assured I'm holding back for the sake of brevity (... he says as this post tops 1000 words and 2 hours of my life).

NHLPA Executive Director Paul Kelly is doing his 30 city tour to get the players' opinion on the CBA and the salary cap, collecting feedback as he heads into the negotiations with the league as to whether to extend this CBA into the first of two potential option years. As with all things, when times are good, everyone's happy and complaints are minimal at best, but the minute things start to go bad even a little, the grumblings will being in earnest.

My opinion is that this is a classic "Dead Cat Bounce" in the US Dollar orchestrated just in time for the November elections, but that doesn't mean it can't be strong enough to last a few months or even a year, which would be just enough time to sink this season's revenue projections and potentially the extension of this CBA.

Ta,