Analyzing the Canadian Dollar’s Outlook: A Crucial Factor in Portfolio Performance

Hello everyone. Hope all is well.

Here is the latest edition of 3 Questions for Bill Richardson.

Question 1: As summer comes to a close, what is your view on the Canadian vs. US Dollar?

We keep a pretty close eye on the Canadian Dollar as fluctuations vs. the US counterpart can have a big influence on portfolio performance.  To start on this discussion, let me answer your question first.

The Canadian Dollar has been trading in a relatively tight trading range since this time last year.  The trading range has been up from a low of about 72 cents to a high of around 76 cents.  If you prefer to look at it the other way from a USD standpoint…$1.31 to $1.38.  If we go back to 2016, the range has been in the 68 to 83-cent range. 

As I write this article the C$ is trading at around 73 cents, so pretty much at the low end of the range so I think the best we’re going to see in the near future is a rebound back up to the 76 cents range.  An easy way to track the wholesale rate is to go to www.investing.com and in the search box at the top of the page type in CAD/USD. 

The bigger problem is the rate that your bank branch may charge you.  I always like to go in with the wholesale rate to see how much they are whacking me.  The same goes for running expenses through your VISA card.  If you are doing larger sums for your corporation, that’s where this is really important.  Ask your banker for a connection to the FX Desk (Foreign Exchange) and they can help you with transactions at very close to the wholesale rate.  I hate paying bank fees and currency conversion spreads are another form of bank fees.

Question 2: What will it take for the Canadian Dollar to break out of this trading range?

There are a broad range of factors that affect the conversion price.  The top five factors are interest rate differentials, economic indicators, monetary policy, political stability, and trade relationships.  Lately, we’ve been seeing a spike in interest rates in both Canada and the United States and traders are closely monitoring how both countries are trending.  As an oil-producing country, the Canadian Dollar has been positively affected by rising oil prices.

Predicting the future is not an exact science but as North America’s central banks continue their fight with inflation through high-interest policies, we are probably going to see the C$ continue to trade in this short-term range and possibly trend toward the top of the longer-term range if rates start to fall dramatically. 

Question 3: How are investment portfolios affected by currency movements?

For most Canadian investors, currency can have a significant impact on your portfolios as equity positions are generally more heavily weighted in US$ securities than Canadian.  This is simply because there are many more large and successful companies south of the border.  Canadian financial markets are much more heavily weighted in banks and energy and US markets are more heavily weighted in technology, healthcare, and consumer consumption type stocks. 

From our experience, the C$ tends to rise when markets are strong and fall when markets are weak, and this creates an interesting dynamic.  For investors with high exposure to US stocks, portfolios tend to rise more slowly during strong markets and fall less during weak markets.  Investors are naturally frustrated when their portfolios seem to underperform when markets are strong but feel better when their portfolios hang in there when markets fall.  The effect of currency movements, therefore, tends to reduce volatility which is a good thing.

In the short term, we believe that currency will have little effect on portfolio performance while stocks range trade awaiting a change in the direction of interest rates.

Enjoy the rest of the Summer and Fall.

Bill