Exchange Rates and the Stanley Cup

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...