Sep 26, 2022
Lagging loonie highlights importance of portfolio currency strategy
By Dale Jackson
U.S. dollar trading with huge risk premium, stagflation hedge: FX strategist
Personal Finance Columnist, Payback Time
It’s a little less tough right now if your investment strategy includes holding a significant portion of your portfolio in U.S.-denominated assets.
After touching a new two-year low of 73.01 cents to the U.S. dollar Monday, the Canadian dollar has far less international buying power than June of 2021 when it topped 83 cents.
On the bright side; it’s still stronger than just over a year before that when it dipped below 70 cents at the onset of the pandemic.
The currency market is volatile these days as central banks use their monetary levers to wrestle inflation, but the reasons don’t really matter for long-term investors.
Currencies fluctuate. What matters is how well your portfolio can adapt to those fluctuations.
Compared with currencies outside the U.S, the loonie is doing quite well. The U.S. dollar, however, is on fire. That means equities held in U.S. dollars will pay bigger dividends and generate bigger capital gains in Canadian dollars when they are sold.
For Canadian investors with U.S. cash accounts in their registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) it means getting more bang for your U.S. bucks.
LOOK OUTSIDE TSX FOR GLOBAL DIVERSIFICATION
Considering Canadian equities account for less than three per cent of publicly-traded global equities and about two-thirds of those are finance or resource related, no Canadian portfolio can be considered diversified without a significant portion invested outside Canada.
U.S. equities account for about half of global equities, which provides more than enough diversification.
There are many foreign mutual funds and exchange-traded funds (ETFs) available on the Canadian market that provide currency hedges. They tend to cost more, which leaves less to invest.
Having the option of investing in U.S. or Canadian dollars hedge-free not only lowers fees, but provides the opportunity to buy U.S. securities when the loonie is strong or Canadian securities when the greenback is strong.
Having that option can also come in handy for individuals who want to spend a good part of their time and money outside Canada.
TIMING IS EVERYTHING
Building up a U.S. dollar portfolio when the Canadian dollar is weak in comparison is like closing the barn door after the horse is gone.
Creating a significant U.S. dollar trading account is not something you do overnight. It’s more about being opportunistic over time.
Karl Schamotta, the chief market strategist with Corpay, is holding his year-end outlook for the loonie at 76 cents to the U.S. dollar; slightly higher than its current level, but is not ruling out a bottom at 71 cents.
He said he expects “a tumultuous few months ahead, as investors downgrade Canada’s growth prospects and brace for something resembling a balance sheet recession.”
Predicting currency fluctuations is extremely difficult in the best of times. Instead of speculating, long-term investors might be wise to select trigger points to load up or sell U.S. dollars.
As an example, when the loonie rises above 80 cents, purchase U.S. dollars. When it drifts below 70 cents, use those U.S. dollars to buy cheap Canadian dollars.
It’s up to you where to set the trigger points; a qualified investment advisor can certainly help.
It can also be difficult to track currency movements over long periods of time. To make it easier, many trading platforms offer automated alerts that you can set at your trigger points.