Over the last number of years, the Canadian dollar has had many ups and downs against its U.S. counterpart.
In 2002, the loonie hit a low of 61.98 cents, climbed to parity (and beyond) in 2007 and several times thereafter, and has been trading in the mid-seventy cent range for some time now*.
What are the major drivers of the US$/C$ exchange rate and what does our currently weak Canadian dollar mean for investors? Let’s take a closer look.
Some experts have categorized the Canadian dollar as a petrocurrency ** -- that is, a currency that rises and falls with oil prices – and Canada is, after all, an oil producing country with large oil exports. But other experts ***see a number of interrelated drivers behind the rise and fall of the Canadian dollar , including:
•A strong Canadian economy raises demand for the loonie, and hence its value, on international markets, while a weak economy lowers demand and reduces its value.
•When Canadian interest rates are lower than U.S. rates, the loonie typically weakens.
•Lower inflation in Canada relative to the U.S. can raise the value of the loonie, while lower inflation in the U.S. can lower its value.
•Current account balance is a measure of the flow of goods, services and investment income between Canada and the rest of the world. A current account surplus means Canada is selling more than it is buying, resulting in a net flow of money into Canada and pushing up the demand for Canadian dollars. A current account deficit means a flow of money out of Canada and a downward-trending exchange rate.
•Canada is an exporter of resource-based commodities, so the value of the loonie is affected by the strength or weakness of world commodity prices.
•In unstable economic times, investors look for “safe” currencies and the U.S. dollar has been traditionally considered a “safe” choice and thus strengthens against many major currencies including the Canadian dollar.
What does all this mean for Canadian dollar investors? Well, if you hold U.S. investments, a lowering loonie is a good thing because it improves returns on your U.S. holdings. If you have hedged your international investments (meaning you have applied a strategy, by buying or selling futures or options contracts, to offset currency risk) you would not have benefited from the reduction in the value of the loonie, but you would be protected from losses related to currency if the value of
the loonie rises.
The short answer is that a weakening loonie is generally good news for unhedged Canadian investors – but nobody knows for certain where the loonie will go. The solution is to maintain an investment portfolio with an appropriately diversified global asset mix within a comprehensive financial plan. Talk to your professional advisor about what’s best for your personal situation.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.
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