Differing Opinions on US Currency Investments for Canadians

A fellow blogger (Y HAT) has a somewhat different view on investmenting USD currency investments:

As I write this the Canadian dollar is trading at $1.07 to the US greenback and most Canadian finance articles I’m reading are suggesting you should jump into US equities – these are cheap by historical standards and the Canadian dollar is bound to retreat. This blog’s opinion is that no one knows were the loonie is headed next. Consequently, you should save yourself a lot of stress by insuring your portfolio against currency movements.

First of all, there is no right answer. Just like there is no formula for how much fixed-income you should hold versus how much equities, or how much emerging markets/small caps you should hold versus everything else. It’s all about how much risk you can handle. Certainly the advice that you should “save yourself a lot of stress by insuring your portfolio against currency movements” does not apply to everyone.

I agree that “no one knows were the loonie is headed next,” just as no one knows where the Canadian equities market is headed next or where the bond market is headed next, which is why I hold a bit of each to reduce my overall risk and/or increase my overall returns through diversification. In the long run though, by the time I retire, I don’t think swings in the USD/CAD exchange rate will amount to any significant gain/loss in my portfolio, but I may have gained more significantly through rebalancing (better with less correlated assets) and lower costs. Maybe in the future I will look back and with perfect hindsight I will wish I had bought XIN instead of VEA, but my present opinion is that I do not think anyone needs to get their knickers in a knot over purchasing US dollar-based investments.

3 thoughts on “Differing Opinions on US Currency Investments for Canadians”

  1. Just a semi-wild guess. When you invest in the TSX, you’re about 20% exposed to the US currency. Manulife, Great West, Royal Bank, TD Bank, Bank of Montreal, Teck Cominco, Borelex, and Canadian National Railway are only a few of the names that I recognize to have signification operations in the States. Think I read somewhere that Canada exports ~70% to States? Don’t remember the exact figure, but it’s up there.

    It depends on your existing allocation too. If 40% of your portfolio is in unhedged VTI, you may be over-exposed to this foreign currency.

    I agree with your assessment. A balanced approach is prudent. Say half VTI and half XSP.

  2. Good point, there is exposure to it regardless, through Canadian companies. I’ve subscribed to your blog and look forward to trying it out.

    I may be overexposed to foreign currencies at this point…although I expect to shift towards more fixed income as I get older (which will be Canadian bonds and such) and there will be a slow shift towards more Canadian dollars the older I get.

  3. Much of the Canadian market is linked with the U.S., but our commodities trade on a world market and can be sold elsewhere, though the price is still affected by US demand.

    I’d say its NOT a good time to get into US assets (though that is a large blanket statement and there ARE deals out there right now.) I just think the US economy and dollar have some more downward room and will be headed lower. This isn’t a bottom, I know that much.

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