How to Handle the Currency Factor


currency factor

You may not know this, but I have a pretty diverse readership. Roughly 44% of my readers are Americans, 40% is Canadian and 6% coming from Europe. Over the past three years, there was a major concern all readers shared with me; the currency factor.

Each time there are important currency exchange movements; investors from one country see a big jump. Recently, both Canadians and Europeans got great deals if they bought US stocks back in 2011-2012. At that time, the greenback was undervalued due to very low interest rates and the fact the FED was printing money faster than I ate my Easter eggs. Fast forward a few years and the situation has now completely shifted; the US dollar is stronger than ever. Now, the question I keep getting from both sides;

Is there a way to benefit from the currency movements?

Oh! Don’t worry, you can keep reading, this is not some kind of twisted marketing post about forex services ;-)


What if you are on this side as the US dollar went up

If you are an American investor, the best thing you could do is to look for outside opportunities. I will agree with you; you currently show both the strongest economy and stock market. However, there is definitely a play to make in buying a few dividend stocks in Canada. There are three very interesting industries that pay dividends for US investors: Energy, Financial and Telecoms.

At the moment, my favorite picks would be among the energy sector as it was hit right, left and center over the past couple of years. This is a perfect time to buy great dividend payers at a low price (both in term of stock value and in dollar value). Here are a few ideas to start hunting:

 hunting ideasTo this list, I would also add Black Diamond Group (BDI) and Emera (EMA.TO).


In addition to the energy industry, I would definitely look at Canadian Banks if you look for a steady dividend payer. Banks are known in Canada to do two things: they are solid and increase their dividend each year. There isn’t much growth expected from financials this year, but the dividend is far from being at risk. My favorite picks in this sector are Royal Bank (RY.TO) and TD Bank (TD.TO) for their size and experience and National Bank (NA.TO) and Gluskin Sheff (GS.TO) for the fact they are smaller and linked to wealth management.

Finally, the latest sector that could be of interest is the telecom industry since they operate in an oligopoly. My favorite pick is definitely Telus (T.TO) as it earns more money per customer than any of its peers at the moment. BCE (BCE.TO) is also an interesting pick for those looking for a higher dividend.

Overall, buying Canadian dividend stocks is a good play considering the dollar can’t really go higher than this over the long haul. Over the next year, it could gain another 10%, but sooner or later, the oil price will bounce back for good and the Canadian dollar will go back to $0.85/USD. Plus, if you hold your Canadian holdings in a tax sheltered account, there are tax treaties preserving dividends from tax withholding rules (check with your accountant first).


What if you are on the other side

I must admit I get more emails from “the guys from the other side”. Being a Canadian, I was part of the group of investors who saw the potential back in 2012 and I’m laughing right now as my portfolio is showing very strong results. But now that the Canadian economy is going sideways and the US dollar is at its peak (or almost), what is left for Canadian investors?

Personally, if I was to receive a big check of 100K tomorrow morning to invest, I will still invest half of this amount in US stocks. It is true the currency might affect my portfolio over a short period of time, but the growth potential over the next 10, 15, 25 years is way more important in the USA than in Canada. The truth is that there is only so much movement a dollar can swing compared to another one. At one point, this movement will become meaningless compared to the investment return itself. I’ve put the Coca-Cola (KO) stock graph compared to the CAD value side by side to see if it really matters:


As you can see, the Canadian dollar lost 10% since 2006. Therefore, if a Canadian would have bought KO back in 2006, he would have made a total return of 96.92% + 10.20% (plus dividend).

Do you really think the same investor would have been crying if the Canadian dollar had gained 10% instead of losing it during the same period?


The real effect over the long haul

I once attended a portfolio managers’ conference and one attendee asked the following question:

Should I consider investing in a US dollar hedged mutual fund or in a mutual fund that is not hedged?

The portfolio manager simply smiles back and asks the investor:

What do you want to hedge your money from anyways?

His point was that over a very long period of time, the currency effect was minimal on a portfolio. I tend to agree with him. Over a 20 year period, the right investment will be worth twice, triple, four times your initial investment. During the same period of time, the currency rate will change maybe 10-20%? 20% over 20 years… it’s less than inflation…

I clearly understand that when you look at your statement quarter to quarter, the dollar will have an effect on the value of your portfolio. But if you look at it only each year or once every three years, you won’t see this impact anymore.

Once again; your asset allocation is more important than the timing or the currency rate you will invest in. Build a solid investment plan using solid investing principles and you will become a wealthy investor.

Disclaimer: I hold shares of BDI.TO, NA.TO, T.TO

Image credit (Pinterest)

Leave a Reply