Pattie Lovett-Reid: How the rising loonie is hurting your U.S. stock returns
I'm not sure how many investors saw this coming: a 10 per-cent-appreciation in the Canadian dollar against the greenback.
There has been, for lack of a better word, "disruption" in Washington lately, with the most recent event being Trump firing his communications director after just 10 days on the job. On the news, the U.S. dollar fell and Canadian investors in U.S. stocks were punished again.
For Canadian investors who have increased their exposure to the U.S. via stocks or mutual funds, they are essentially placing two bets: One the stock or mutual fund will go higher and one on the currency itself. The TSX has been a miserable place to invest this year, so it is only natural investors have been seeking out better return potential.
When buying a stock, most of us have a home time bias. If we own Canadian stocks and they go up in value, we benefit. But once you add in the currency risk, things get a little trickier. Here’s why. There is a pick-up in returns when the Canadian dollar falls against a foreign currency.
Chatting with mom today about her portfolio and exposure to the U.S. unnerved her. She may like the companies she is invested in but she feels she can't control the movement in the currency leaving her feeling more vulnerable and reassessing her tolerance for risk.
With the Fed contemplating a rate hike providing support for the U.S. dollar, the uncertainty in the White House leaves some wondering if the potential is there for the U.S. dollar to continue to fall. Add to this the data points in Canada suggesting a stronger economy and the odds increasing another rate hike could be on the horizon for Canadian investors who own U.S. stocks the result could be disappointing performance; not because the companies didn't perform well, but because of an ongoing headwind - a higher Canadian dollar.
No one can truly time the market. When assessing their own risk profile, it is important for investors consider the amount of foreign content they have in our portfolios and the currency risk associated with it.
You cannot underestimate the drag currency moves can have when you least expect it.