As currency values shift and global markets remain unpredictable, understanding the effects of a weak Canadian dollar (CAD) can help you better manage risk and align your investments with your financial goals.
The Impact on Foreign Investments
When the Canadian dollar weakens, foreign holdings in your portfolio — especially those denominated in U.S. dollars — can benefit. A lower CAD means that when you convert your foreign assets back to Canadian dollars, you should receive more CAD for each unit of foreign currency.
For example, if you purchased U.S. stock at an exchange rate of $1.30 CAD per USD, it cost you $130 CAD for $100 USD worth of the U.S. stock. If the stock price stays the same but the exchange rate shifts to $1.40 CAD per USD, your investment’s value in Canadian dollars increases to $140 CAD. That’s a gain simply from the currency movement.
However, this boost works both ways. If the Canadian dollar strengthens, the value of your foreign investments can shrink when converted back to CAD. This currency risk is an important factor to consider when holding unhedged foreign assets.
Why Understanding Currency Impact Matters
A low Canadian dollar doesn’t affect all parts of your portfolio equally, but it plays a key role in your overall investment outcome. By recognizing which assets may benefit and which may face headwinds, you can make informed decisions to better protect your portfolio and take advantage of opportunities amid currency shifts.
Whether you’re focused on growth, income, or capital preservation, keeping an eye on currency trends and employing strategies like diversification or hedging can add resilience to your investment approach.
The influence of a low Canadian dollar on domestic stocks varies across sectors. Companies earning substantial revenue from foreign markets can see a boost as their foreign earnings convert into more Canadian dollars. On the other hand, some industries face challenges with a low Canadian dollar. For example, companies relying heavily on imported goods or raw materials tend to experience higher costs. Or, those importing products may see squeezed profit margins or need to pass costs onto consumers.
Strategies for Managing Currency Risk
If fluctuations in the Canadian dollar worry you, there are ways to manage this risk within your portfolio:
- Currency Hedging: Consider investing in currency-hedged ETFs or mutual funds, which use financial tools to help to offset currency swings and help stabilize returns.
- Long-Term Investing: For investors with a horizon of 10 years or more, currency movements often balance out over time, making currency risk less critical when holding quality assets.
- Diversification: Spreading investments across various currencies and asset types can help smooth out the ups and downs caused by currency volatility.