On Jan. 12, the Canadian dollar hit a two-and-a-half-year high of $1.0154 against the U.S. dollar. Most experts, including Finance Minister Jim Flaherty, predict the loonie will stay around par for the foreseeable future, and many expect it to rise further.
A strong loonie means happy days for travellers and shoppers. Statistics Canada reported that travel by Canadians to the U.S. climbed by 3.2 per cent in November, while overnight car trips were up by 6.2 per cent, to 1.1 million.
However, if the Canadian dollar continues to climb, investors in the stock market will see the paper value of their U.S. dollar investments slide once converted to Canadian currency. But a bit of good, old fashioned hedging can go some way to ameliorating the situation.
One of the easiest options is to purchase U.S. investments through exchanged traded funds (ETFs) which employ their own hedging strategy to neutralize the currency factor. So, no matter what happens to the dollar, the investment is not affected. The unit price will go up and down with the stock market but currency moves alone won’t alter the value.
Another option is to stay home and invest only in Canadian stocks, bonds or mutual funds so the sticks and stones of currency traders won’t break any investment bones. Some may argue such a strategy lacks diversification but after the last few years on the stock market, home looks pretty good.
The final option is to plunge in and buy U.S. investments in U.S. dollars, betting that the loonie won’t last long at such lofty heights. Most economists agree that the fair value of the dollar is around 85 cents, so it seems a reasonable assumption that it will fall back to that level eventually.
If you choose the latter, and there are some bargains right now in large U.S. companies such as Kraft, Johnson & Johnson, McDonald’s and Hewlett-Packard, just be prepared for your bottom line to decline if the loonie heads north.