The Impact of a Climbing Canadian Dollar on Your Portfolio

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September 28, 2017

The daily fluctuations of the Canadian Dollar (CAD) versus its counterpart, the US dollar (USD), isn’t part of most dinner-table conversations. However, it does make ours! In the past 18 months we’ve seen the CAD trade as low as $0.68 and has since moved up to $0.82 as of September 15,2017 (The Bank of Canada)…a swing of ~21%! If you plan on traveling and spending U.S. dollars, or have U.S. investments in your portfolio, it’s important to know how currency relates to performance over the long term.

Your portfolio

When looking at the sum of your accounts in Canadian dollars, currency swings do impact the day-to-day value of your portfolio.

Year-to-date the Canadian dollar has appreciated 9.6% against the USD. Put simply, if a portfolio had 25% of its’ exposure to U.S. securities, that would result in a 2.5% decline in portfolio value (converted back into CAD) due to currency.

Source: Bloomberg

Protecting you

Many of our investments have built in protection from these swings. First, they employ currency ‘hedge’ strategies where they can remove the effect of currency swings altogether. When conducting due diligence on investment managers, we take great care in understanding their approach to currency management. Second, in portfolios that consist of a basket of currencies (e.g. USD, Euro, Yen) the added diversity can offset any one currency move.

Does it make a difference over the long term?

Like the dinner-table conversation, we at The Wooding Group have great discussions on what this means for your portfolio. We know that if your time horizon is long, the daily, quarterly and yearly swings of currency will not affect the long-term outcome. If you have a shorter-term time horizon, such as RRIF income or you are planning for any large purchases, we always ensure that your short-term needs are covered with a lower risk investment that does not have currency swings attached to it.

To dig a little deeper, we recommend: The Portfolio is the Hedge

What can I do today?

Despite the climb of the Canadian dollar, keeping things as they are as opposed to making drastic changes in your portfolio is typically the recommended approach. However, each case is unique and we welcome you to start discussions with our team about what is best for your particular situation. Here are a few general strategies we feel are important to highlight for your consideration:

  1. If you plan to need U.S. Dollars in the next 12 months: consider starting to accumulate those funds today. While predicting currency is near impossible, we do know CAD has not been this high in the past 2 years. We encourage you to ask us about some low-cost ways to accomplish this.
  2. If you plan to sell U.S. securities or stocks in the near future: keep them in USD until we find an ideal time to purchase back Canadian dollars.

Predicting the outcome of currency is an ongoing challenge, even for those who specialize in the area and spend their entire career focusing on it. Central Banks, geopolitical events, and commodity prices all play a part in the daily value and overall direction.

If you should have any questions related to currency and its impacts on your portfolio, please feel free to reach out to me (Pete MacPhie) or your personal wealth management advisor on our team. 

Should the Canadian dollar’s strength continue, we hope an opportunity comes your way to enjoy a U.S. vacation that will be bit cheaper than a few months ago!

The Wooding Group at CIBC Wood Gundy, 780 498-5021