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<p>Last November, as the Canadian dollar was starting to fall, <a href="http://canucksarmy.com/2014/11/18/cap-crunch-how-a-weak-canadian-dollar-will-put-nhl-teams-in-a-tough-position">I attempted to estimate the impact a sliding Canadian dollar would have on the 2015 Salary Cap</a>. </p>
<p><a href="http://canucksarmy.com/2014/11/18/cap-crunch-how-a-weak-canadian-dollar-will-put-nhl-teams-in-a-tough-position"><span style="color: rgb(85, 85, 85);">In the absence of the league&#8217;s confidential information, estimating league revenues and, more importantly, their exposure to foreign exchange risk, is an almost impossible exercise. Basically, you have to layer one assumption on top of another. Nevertheless, in my work I estimated that a $67-69M cap was not out of the question depending on what happened with the Canadian dollar. <br /></span></a></p>
<p>It was only a few weeks later that Gary Bettman announced at the December Board of Governers meeting that he expected the Salary Cap would be around $73M for the 2015 season. This news must have come as a relief to many General Managers. &#8220;No need to cut down on egregious contracts, we have plenty of room. Crisis averted.&#8221;</p>
<p>Only, apparently there was a bit more foreign exchange exposure than Bettman realized back in December.</p>
<p></p>
<p>
<script async="" charset="utf-8" src="//platform.twitter.com/widgets.js"></script></p>
<blockquote class="twitter-tweet" lang="en">
<p lang="en" dir="ltr">Bettman&#8217;s cap projections:<br />
Dec 2014 &#8211; $73m<br />
Feb 2015 &#8211; 72m<br />
Apr 2015 &#8211; 71.5m<br />
May 2015 &#8211; 71m<br />
June 2015 &#8211; ?</p>
<p>— m g (@kikkerlaika) <a href="https://twitter.com/kikkerlaika/status/601979127957184512">May 23, 2015</a>
</p></blockquote>
<p>In the chart below, we can see how the decline in the league&#8217;s cap projections is in step with the decline of the Canadian dollar versus the US dollar: </p>
<p><img loading="lazy" decoding="async" src="//thenationnetwork.s3.amazonaws.com/uploads/images/16/f1/article_16f14770-602a-480e-8396-7b995d1e36d2.png" alt="salary cap decline with CAD" width="600" height="361"></p>
<p></p>
<p>On Sunday, the Globe and Mail&#8217;s James Mirtle (@mirtle) had this to say in a series of tweets: </p>
<p>&#8220;NHL&#8217;s inflator may well be less than 5 per cent but more than zero. First time if it happens. That is more downward pressure on the NHL&#8217;s cap. A 2.5% escalator would be a drop of roughly $1.7-million in next year&#8217;s salary cap! That&#8217;s such a big difference you can see why league would fight that &#8220;compromise&#8221; solution. Some teams can&#8217;t afford that low a cap. To clarify&#8230; if NHL&#8217;s cap is expected to be $71-million with 5% escalator, it&#8217;d be roughly $69.3-million with 2.5%. Big difference.&#8221;</p>
<p>Clearly, the cap situation is turning out to be worse than the league had expected back in December, and many GM&#8217;s appear to have been caught flat footed. Volatility like this creates both risks and opportunities. </p>
<h2><b>Exploiting the Cap Situation of Other Teams</b></h2>
<p>The top teams in the league will be in for a world of pain this summer if the Salary Cap ends up being in the range Mirtle alluded to on Sunday. It&#8217;s already been contemplated that a team like Chicago may have to look seriously at moving players like<a href="http://www.theglobeandmail.com/sports/hockey/dealing-bickell-crawford-is-blackhawks-best-path-out-of-salary-cap-hell/article24611049/?cmpid=rss1&amp;click=sf_globe"> Bryan Bickell and Corey Crawford </a>in order to get in under the cap. </p>
<p>Boston already has $63.1M commitment, and that&#8217;s before signing Dougie Hamilton, who is the future of the Bruins blue line. I assume free agents like Carl Soderberg and Matt Bartkowski have already said their goodbyes. </p>
<p>Then there is the RFA market. Will this be the year a cap-space rich team with deep pockets like the Buffalo Sabres offer sheets a player like Hamilton or Vladimir Tarasenko? It sure would be nice to have the cap-space to give it a try.</p>
<h2><b>Impact on the Trade Market</b></h2>
<p>As the cap comes down, it becomes a buyers market for established players with hefty contracts. I&#8217;ve advocated moving Kevin Bieksa, Dan Hamhuis, and Radim Vrbata, all of whom will be free agents next summer. The trouble is, with teams like Chicago, Boston, Tampa, and Philadelphia all close to the cap there will be more and more competition to move aging veterans with big price tags, and the value of the return will decrease. </p>
<h2><b>The Canucks Situation</b></h2>
<p>Ironically, back in November I noted that the Canucks could be in a situation to exploit the cap pain of their peers, but that was before they committed $6.2M to Luca Sbisa and Derek Dorsett. <a href="http://stats.nhlnumbers.com/teams/VAN?year=2016">According to NHLNumbers.com, the Canucks have $66.6 Million in cap space committed for next season to 10 forwards, 5 defensemen, and 2 goalies</a>. If the cap ends up being in the $69M range, then this offseason just got a lot tougher for Jim Benning as he&#8217;ll have to fill a number of roster spots in around the league minimum mark in order to field a salary cap compliant roster. </p>
<p>This also means that Benning will likely have to trim every penny of salary he can for the Canucks to be cap compliant. We assume that veterans like Kevin Bieksa and Chris Higgins will be on the move if they allow Benning to trade them, but <a href="http://canucksarmy.com/2015/5/19/are-the-canucks-going-to-trade-zack-kassian">a player like Zack Kassian might be forced out as well</a>. Also, the team will not be able to keep Jacob Markstrom in the minors if they re-sign him to a new RFA deal. One of either Miller, Markstrom, or Lack will have to go.</p>
</p>
<h2><b>Conclusion</b></h2>
<p>There are areas that are within the control of a team&#8217;s management, but the foreign currency markets aren&#8217;t one of them. As such, teams need to evaluate their cap situation under a variety of scenarios and plan accordingly. Financial liquidity is an asset that should never be undervalued. </p>
<p>As fans, we should expect management to do more than take the league&#8217;s estimate for the cap and manage to it. They should be asking question like &#8220;what happens if the Canadian dollar drops to $0.80?&#8221; &#8220;What happens if the league&#8217;s estimate of revenue growths comes in a percent lower than expected?&#8221; &#8220;If these &#8216;worst case&#8217; scenarios play out, how does that impact who we sign, when we sign them, and how much we sign them for?&#8221;</p>
<p>From the big dollar signings the team has made in the last twelve months, specifically the $12.2M allocated to Ryan Miller, Derek Dorsett, and Luca Sbisa, one can only assume that either a) this type of work isn&#8217;t being done, b) its being done, but is ignored by senior management, or c) senior management is aware of the risks associated with these signings in a &#8220;worst case&#8221; salary cap scenario and has built a contingency plan we should expect to see play out in the next couple months. </p>
<p>In the past, the Gillis/Gilman tandem was masterful when it came to salary cap management. Unfortunately, as a result of the Lindenning administration&#8217;s allocation of $12.2M to Miller, Sbisa, and Dorsett, the Canucks have not only lost an opportunity to exploit their competition, but they&#8217;ve put themselves in a bind if they still plan on fielding a competitive roster next fall. It&#8217;s going to be tough to improve when you have no money to spend on getting better.</p>
<p>Of course, there&#8217;s always a chance that this is all part of Benning&#8217;s master plan. We know from last season that he&#8217;s not afraid to make moves when necessary. It&#8217;s all leading up to what we can expect will be an action packed off season for the Canucks head office. It remains to be seen whether that is a good or bad thing. </p>

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</div><p>Last November, as the Canadian dollar was starting to fall, <a href="http://canucksarmy.com/2014/11/18/cap-crunch-how-a-weak-canadian-dollar-will-put-nhl-teams-in-a-tough-position">I attempted to estimate the impact a sliding Canadian dollar would have on the 2015 Salary Cap</a>. </p><a href="http://canucksarmy.com/2014/11/18/cap-crunch-how-a-weak-canadian-dollar-will-put-nhl-teams-in-a-tough-position"><span style="color: rgb(85, 85, 85);">In the absence of the league's confidential information, estimating league revenues and, more importantly, their exposure to foreign exchange risk, is an almost impossible exercise. Basically, you have to layer one assumption on top of another. Nevertheless, in my work I estimated that a $67-69M cap was not out of the question depending on what happened with the Canadian dollar. <br></span></a><p>It was only a few weeks later that Gary Bettman announced at the December Board of Governers meeting that he expected the Salary Cap would be around $73M for the 2015 season. This news must have come as a relief to many General Managers. "No need to cut down on egregious contracts, we have plenty of room. Crisis averted."<br></p><p>Only, apparently there was a bit more foreign exchange exposure than Bettman realized back in December.</p><p>
<script async="" charset="utf-8" src="//platform.twitter.com/widgets.js"></script></p><blockquote class="twitter-tweet" lang="en">
<p lang="en" dir="ltr">Bettman's cap projections:
Dec 2014 - $73m
Feb 2015 - 72m
Apr 2015 - 71.5m
May 2015 - 71m
June 2015 - ?</p>— m g (@kikkerlaika) <a href="https://twitter.com/kikkerlaika/status/601979127957184512">May 23, 2015</a>
</blockquote><p>In the chart below, we can see how the decline in the league's cap projections is in step with the decline of the Canadian dollar versus the US dollar: </p><p><img src="//thenationnetwork.s3.amazonaws.com/uploads/images/16/f1/article_16f14770-602a-480e-8396-7b995d1e36d2.png" alt="salary cap decline with CAD" width="600" height="361"></p><p><br></p><p>On Sunday, the Globe and Mail's James Mirtle (@mirtle) had this to say in a series of tweets: </p><p>"NHL's inflator may well be less than 5 per cent but more than zero. First time if it happens. That is more downward pressure on the NHL's cap. A 2.5% escalator would be a drop of roughly $1.7-million in next year's salary cap! That's such a big difference you can see why league would fight that "compromise" solution. Some teams can't afford that low a cap. To clarify... if NHL's cap is expected to be $71-million with 5% escalator, it'd be roughly $69.3-million with 2.5%. Big difference."</p><p>Clearly, the cap situation is turning out to be worse than the league had expected back in December, and many GM's appear to have been caught flat footed. Volatility like this creates both risks and opportunities. </p><h2><b>Exploiting the Cap Situation of Other Teams</b></h2><p>The top teams in the league will be in for a world of pain this summer if the Salary Cap ends up being in the range Mirtle alluded to on Sunday. It's already been contemplated that a team like Chicago may have to look seriously at moving players like<a href="http://www.theglobeandmail.com/sports/hockey/dealing-bickell-crawford-is-blackhawks-best-path-out-of-salary-cap-hell/article24611049/?cmpid=rss1&amp;click=sf_globe"> Bryan Bickell and Corey Crawford </a>in order to get in under the cap. </p><p>Boston already has $63.1M commitment, and that's before signing Dougie Hamilton, who is the future of the Bruins blue line. I assume free agents like Carl Soderberg and Matt Bartkowski have already said their goodbyes. </p><p>Then there is the RFA market. Will this be the year a cap-space rich team with deep pockets like the Buffalo Sabres offer sheets a player like Hamilton or Vladimir Tarasenko? It sure would be nice to have the cap-space to give it a try.</p><h2><b>Impact on the Trade Market</b></h2><p>As the cap comes down, it becomes a buyers market for established players with hefty contracts. I've advocated moving Kevin Bieksa, Dan Hamhuis, and Radim Vrbata, all of whom will be free agents next summer. The trouble is, with teams like Chicago, Boston, Tampa, and Philadelphia all close to the cap there will be more and more competition to move aging veterans with big price tags, and the value of the return will decrease. </p><h2><b>The Canucks Situation</b></h2><p>Ironically, back in November I noted that the Canucks could be in a situation to exploit the cap pain of their peers, but that was before they committed $6.2M to Luca Sbisa and Derek Dorsett. <a href="http://stats.nhlnumbers.com/teams/VAN?year=2016">According to NHLNumbers.com, the Canucks have $66.6 Million in cap space committed for next season to 10 forwards, 5 defensemen, and 2 goalies</a>. If the cap ends up being in the $69M range, then this offseason just got a lot tougher for Jim Benning as he'll have to fill a number of roster spots in around the league minimum mark in order to field a salary cap compliant roster. </p><p>This also means that Benning will likely have to trim every penny of salary he can for the Canucks to be cap compliant. We assume that veterans like Kevin Bieksa and Chris Higgins will be on the move if they allow Benning to trade them, but <a href="http://canucksarmy.com/2015/5/19/are-the-canucks-going-to-trade-zack-kassian">a player like Zack Kassian might be forced out as well</a>. Also, the team will not be able to keep Jacob Markstrom in the minors if they re-sign him to a new RFA deal. One of either Miller, Markstrom, or Lack will have to go.</p><p></p><h2><b>Conclusion</b></h2><p>There are areas that are within the control of a team's management, but the foreign currency markets aren't one of them. As such, teams need to evaluate their cap situation under a variety of scenarios and plan accordingly. Financial liquidity is an asset that should never be undervalued. </p><p>As fans, we should expect management to do more than take the league's estimate for the cap and manage to it. They should be asking question like "what happens if the Canadian dollar drops to $0.80?" "What happens if the league's estimate of revenue growths comes in a percent lower than expected?" "If these 'worst case' scenarios play out, how does that impact who we sign, when we sign them, and how much we sign them for?"</p><p>From the big dollar signings the team has made in the last twelve months, specifically the $12.2M allocated to Ryan Miller, Derek Dorsett, and Luca Sbisa, one can only assume that either a) this type of work isn't being done, b) its being done, but is ignored by senior management, or c) senior management is aware of the risks associated with these signings in a "worst case" salary cap scenario and has built a contingency plan we should expect to see play out in the next couple months. </p><p>In the past, the Gillis/Gilman tandem was masterful when it came to salary cap management. Unfortunately, as a result of the Lindenning administration's allocation of $12.2M to Miller, Sbisa, and Dorsett, the Canucks have not only lost an opportunity to exploit their competition, but they've put themselves in a bind if they still plan on fielding a competitive roster next fall. It's going to be tough to improve when you have no money to spend on getting better.<br></p><p>Of course, there's always a chance that this is all part of Benning's master plan. We know from last season that he's not afraid to make moves when necessary. It's all leading up to what we can expect will be an action packed off season for the Canucks head office. It remains to be seen whether that is a good or bad thing. </p>

Canadian Dollar Volatility and the Salary Cap

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