The Canadian Dollar Just Hit a 5-Week High: Here’s What it Means for U.S. Stocks
Written by Amy Legate-Wolfe at The Motley Fool Canada
Your U.S. stocks can have a perfectly good day while your Canadian-dollar account balance goes backwards. It feels unfair until you separate the two things you own: the investment and its exposure to another currency.
The Canadian dollar reached a five-week high on October 23. That’s welcome news for Canadians shopping in U.S. dollars. For money already invested south of the border, a stronger loonie can reduce what those holdings are worth when translated into home currency.
The business hasn’t necessarily weakened. Your share of the company is unchanged. Each U.S. dollar of value simply buys fewer Canadian dollars, which can make an otherwise healthy investment look disappointing on the account screen.
Two returns arrive together
Suppose you own US$10,000 of investments when one U.S. dollar buys $1.40. Their Canadian value is $14,000. If the exchange rate moves to $1.35 and the investments don’t change, the value becomes C$13,500.
That’s a $500 decline without a fall in the U.S. holdings. So as you can see, even a relatively small currency change can still be visible on a sizeable account.
The two effects can also work against each other. If the investments rise 5% to US$10,500 while the exchange rate falls to $1.35, the Canadian value becomes $14,175. You earned 5% in U.S. dollars but only 1.25% in Canadian dollars before costs and taxes.
The ticker doesn’t settle the currency
The Vanguard S&P 500 Index ETF (TSX: VFV) is a familiar way for Canadians to own large U.S. companies. You buy its Canadian-listed units in Canadian dollars. The underlying investments still create U.S.-dollar exposure.
That distinction is easy to miss. Paying in Canadian dollars describes the purchase transaction. It doesn’t mean the fund removes currency movements from the return. VFV is an unhedged fund, so exchange rates remain part of the experience.
I like VFV as a straightforward long-term holding for U.S. equity exposure. You participate in a broad collection of companies instead of choosing a single winner. Its largest companies still have considerable influence, and it doesn’t replace a full global portfolio.
For a new contribution, the stronger loonie can be helpful. At $1.40 per U.S. dollar, $1,000 represents about US$714. At $1.35, it represents about US$741 before conversion costs. The same savings buy a little more exposure to the underlying businesses.
Keep the timeline in charge
I’d continue regular purchases for long-term savings instead of waiting for a perfect exchange rate. Predicting both the stock market and the currency makes a simple investing habit much harder to maintain. Spreading purchases means different contributions meet different rates.
