Most everyone has noticed the Canadian dollar took a quick elevator down in the last couple of months. The loonie fell from virtual parity with the U.S. dollar in early May, rallied briefly to 98.5 cents US on June 14, then dropped to 94.5 cents after Federal Reserve chairman Ben Bernanke's famous speech a few days later.
What can you do about the potential fall (or rise) in the rate of exchange between Canadian and U.S. currency?
The answers to that question vary, depending on your personal situation. For example, if you are an exporter with all your costs in Canadian dollars, your perspective is exactly opposite to that of a snowbird or cross-border shopper.
We will try to look at all those points of view, but let's start with what we know for sure. From here, I can virtually guarantee the exchange rate will either go up or down, although I acknowledge I could be wrong, as there is a slim possibility it could stay the same.
I base that lack of prediction on significant research and a thorough review of many expert opinions. Some very smart economists and investment managers are predicting the fall will continue until the Canadian dollar hits 85 cents US. Other equally smart observers think we are near equilibrium at 96 cents, while still others think the loonie will rebound to parity.
In other words, there is no clear consensus on the direction of the loonie.
If you are an investor who owns mutual funds that invest in U.S. stocks, or you own U.S. stocks directly, you actually want the Canadian dollar to fall against the greenback. The effect for you is a rising U.S. dollar, and a rise in your investment values, all other things being equal.
Exporters, and all of us who have a stake in the Canadian economy, favour the same thing. Do not despair when the Canadian dollar falls. This is not a sign we need to reinvigorate our national inferiority complex. On the contrary, it's generally a positive for our economy.
Obviously, a stronger U.S. dollar hurts those of us who want to travel to the U.S., shop for bargains or spend our winters there. If the differential becomes extreme, then less money will be spent by Canadians in the U.S., and some of that money will be spent in Canada instead. Again, that's a positive for our economy, a negative for the U.S.
This concept is behind phenomena such as the Japanese stock market rallying when their currency is devalued. Currency exchange rates have this wonderful effect of helping to maintain or re-establish equilibrium among economies.
So don't despair... Instead, prepare.
If you spend your winters in the U.S., I hope you already have a U.S. dollar account, with enough set aside there to pay the expected expenses of your annual sojourn. Similarly, if you vacation or shop in the U.S., it's best to hedge the exchange rate and avoid the high rate of exchanging dollars by having an ongoing cache of U.S. dollars.
When the loonie is high, go ahead and use Canadian dollars and pay the cost of exchange. However, when the loonie is low, use those U.S. greenbacks that you've held in reserve.
Strategically, it makes sense for snowbirds and frequent travellers to have a higher percentage of their long-term investments exposed to U.S. dollars.
While a low loonie will make your travels more expensive, the high U.S. dollar will help your investments. (The same logic as a long-haul trucker or RV traveller owning a lot of oil stocks.)
Many investors who like to access greater opportunities outside Canada want to eliminate the currency risk, and they can do this by hedging, or investing in mutual funds that hedge the Canadian dollar. Your investment adviser can help you with this.
In the meantime, think through your personal requirements for U.S. dollars for the next year or two, pay attention to the exchange rate, and stock up when those U.S. dollars are "on sale." If you know you will need additional greenbacks in the coming year, a good strategy might be to purchase half of them now.
Winter will be here before you know it...
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner and adviser with Christianson Wealth Advisers, a vice-president with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.