January 4, 2015 Comments

On Friday, the new year of trading started off with the S&P 500 about flat for the day but with Toronto up 0.8%.

Today the Canadian dollar is at 84.63 American cents. That is $1.18 Canadian to buy one U.S. dollar. Add in the bank fee and you are probably at $1.20 or so. That has to hurt for anyone heading South on vacation. But the good news is that Canadians who hold U.S. stocks or real estate have seen an increase in the value of those assets when measured in Canadian dollars. At the start of 2014 we were at 94.16 cents or $1.062 (wholesale) to buy an American dollar. This change alone, added 11% to the value of American assets when measured in Canadian dollars. This also added 11% to the value of U.S. dollar revenue received by Canadian companies. This should be a real boost to the competitiveness of Canadian manufacturers, especially those who face few expenses in American dollars and whose expenses are largely in Canadian dollars.

On the other hand it will hurt a retailer like Canadian Tire that imports most of its merchandise. They will have to raise price or lower their profit margins. Higher prices would likely lower their sales.

I don’t have much faith in the ability of anyone to predict where the dollar exchange will head next. My general approach to the exchange rate is to try to largely ignore it. For example I have put a certain amount of my investment portfolio into U.S. dollars and I try to think of those dollars as being more or less permanently in U.S. dollars. At some point I will need to spend money int eh U.S. and so reality in that case the exchange rate would not affect me if I use money that has already been in U.S. dollars for some time.

Layered on top of that sort of thinking, I also sometimes (not often) transfer money back and forth. It seems logical to me to favor bringing some U.S. dollars back to Canada at this time. In doing so I would be selling U.S. dollars high (or at least higher) in term of Canadian dollars. Then if the Canadian dollar happened to go back up to say 90 cents or certainly 95 cents I would then favor moving money the other way. At this time I do have cash in my U.S. dollar investment accounts and very little cash in my Canadian dollar accounts. It therefore seems opportune to move some U.S. cash back to Canada at this time. This would be especially true in RRSP accounts where there would be no tax implications on the gain in currency value. There is however usually a fee of about 0.75% (as I recall) to transfer money in each direction. One technique to avoid that is to buy a Canadian stock that also trades in the U.S. (buy it U.S. funds) have the stock transferred to a Canadian account and then sell it in Canada. I believe this can work very well in those RRSP accounts that have both a U.S. and a Canadian component. But there is also the risk that the stock price declines from the time you buy to the time you sell or you face a bid/ask spread. It can also be done with certain currency ETF’s and that may reduce the risk of price changes. Overall this so-called “Norbert’s Gambit” is probably not worth the effort unless we are talking a large amount of money. Google Norbert’s Gambit for more information.

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