Trade war turmoil has pushed the Canadian dollar to over 72 cents to the U.S. dollar; up a couple pennies from 69.91 cents at the start the U.S. President Donald Trump’s term.
The loonie remains weak to the greenback by historic standards, but the current climate of uncertainty could give long-term Canadian investors a chance to bulk up on cheaper U.S. dollars to boost portfolio performance and hedge against the risk that comes with being too heavily invested in Canadian assets.
As uncertainty over the future of its traditional role as the global reserve currency weighs on the greenback, the loonie is getting a comparative lift from the promise of newly elected Prime Minister Mark Carney to shift Canada’s trading priorities and make the country a “global energy powerhouse.”
“The future is very unclear,” says Corpay Chief Market Strategist Karl Schamotta.
“The loonie could continue to move up if the Canadian economy escapes a serious downturn and global investors continue to flee U.S. dollar denominated assets. On the other hand, a Canadian recession coupled with a reassertion of the greenback’s traditional safe-haven role could see weakness return,” he stated in an email.
Global diversification not an option for Canadians
Considering Canadian equities account for less than three per cent of publicly traded global equities, and about two-thirds of them are finance or resource related, no Canadian investment 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.
For Canadians with U.S. cash accounts in their registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), investing directly in U.S. dollars can open up a world of opportunity. It can save thousands of dollars over time in currency exchange fees and act as a hedge against fluctuations in the loonie.
It also means getting more bang for your U.S. buck on investments in other currencies, including the loonie. Equities held in U.S. dollars will pay bigger dividends and generate bigger capital gains in Canadian dollars when they are sold.
Canadian investors can access U.S. stocks directly on most trading platforms. There are also many foreign mutual funds and exchange traded funds (ETFs) available on the Canadian market. Some provide currency hedges, but annual fees can be up to a half per cent higher than their unhedged versions.
In addition to lower fees, investing in U.S. dollars can also act as a hedge against future weakening of the Canadian dollar when it’s time to sell; especially for retirees who want to spend their cash abroad.
Choosing your entry points
Canadian dollar strength is subjective and timing the purchase of U.S. dollars can be tricky in any market.
While the loonie is currently at its highest level this year, it is far below the 83 cent high it reached during the COVID-19 pandemic in 2021. It actually topped the U.S. dollar several times between 2007 and 2012 for the first time in 30 years as the world reeled from the global financial meltdown.
As a general rule, some portfolio managers will waive the guess work and buy U.S. dollars when the loonie tops 80 cents and convert U.S. dollar assets to Canadian dollars when it drifts below 70 cents.
While Karl Schamotta trades currencies for a living, he suggests investors take a methodical approach to accumulating greenbacks in their retirement savings.
“It likely makes sense to continue gradually diversifying outside Canada, moving money in small increments over time, as opposed to throwing it all on one turn of the roulette wheel,” he says.
