# Low Canadian dollar and US stock



## Gimme the Green (Feb 4, 2014)

Hi folks, total noob question and more just for curiosity. In this environment with the low Canadian dollar, are people still purchasing US stock? I mean actually transferring CAD to USD by whatever means (gambit) and then buying whatever stocks they are interested in?


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## none (Jan 15, 2013)

Gimme the Green said:


> Hi folks, total noob question and more just for curiosity. In this environment with the low Canadian dollar, are people still purchasing US stock? I mean actually transferring CAD to USD by whatever means (gambit) and then buying whatever stocks they are interested in?


Of course. The value of the dollar is irrelevant. What you are suggesting is that one should only buy US if they are equivalent. That is not investing but rather speculation - something I try to avoid. The value of the Canadian dollar in the future is unknowable so don't worry about it.


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## Gimme the Green (Feb 4, 2014)

Makes sense. Just having a hard time wrapping my head around it. Converting with a gambit would leave you with the Canadian equivalent of USD in your account - transaction costs. Its just a mental thing for me I guess, you see how far the loonie has dropped since it was at par and it just makes you think you are getting ripped off.


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## tendim (Nov 18, 2010)

none said:


> Of course. The value of the dollar is irrelevant. What you are suggesting is that one should only buy US if they are equivalent. That is not investing but rather speculation - something I try to avoid. The value of the Canadian dollar in the future is unknowable so don't worry about it.


I disagree; I don't believe this is speculation. I think _Gimme the Green_ was asking if folks are converting at the moment, given the horrible rates, to buy US stock. Or, if they are just holding out (i.e. not buying the stock even though they might see it as a good investment, b/c the cost to convert is horrible). 

To answer the OP's question, _no_. If I had CAD cash but not USD, I'd be sinking it north of the border for now; the losses from conversion are not worth the hassle atm.


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## Gimme the Green (Feb 4, 2014)

That was the intent of my question, Taking CAD, converting to USD and then purchasing US based stocks. At what point, exchange wise, does converting become attractive again?


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## CPA Candidate (Dec 15, 2013)

I'm reluctant to buy USD because the CDN has moved downward so quickly. If we get a modest oil bounce back towards the end of the year, the CDN should regain a little ground.


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## none (Jan 15, 2013)

Gimme the Green said:


> That was the intent of my question, Taking CAD, converting to USD and then purchasing US based stocks. At what point, exchange wise, does converting become attractive again?


The above posters are wrong. It doesn't matter what the exchange rate is. The Canadian dollar is worth relative to the US what it is worth. It's like buying gold- that's also not investing, that's speculation. You buy assets that make things - businesses. That's investing. Sure you can make money speculating, you can also make money in Vegas - choose your poison.


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## HaroldCrump (Jun 10, 2009)

The cross rate is meaningless - current value of the stock that you buy in USD will continue to reflect the USDCAD rate.

Buying a USD stock as a way to speculate on the direction of the USDCAD cross is a bad way to play the currency.
If you want to play the currency and you believe CAD will get weaker, just buy USD now and hold as cash.
If you believe CAD will get stronger, sell any USD cash or deposits you have and hold CAD as cash.


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## Gimme the Green (Feb 4, 2014)

HaroldCrump said:


> The cross rate is meaningless - current value of the stock that you buy in USD will continue to reflect the USDCAD rate.
> 
> Buying a USD stock as a way to speculate on the direction of the USDCAD cross is a bad way to play the currency.
> If you want to play the currency and you believe CAD will get weaker, just buy USD now and hold as cash.
> If you believe CAD will get stronger, sell any USD cash or deposits you have and hold CAD as cash.


Sorry, I should clarify. I have no interest in playing the currency. My question relates to the average joe just wanting to buy some US dividend paying stock to use towards retirement savings. So somebody today, 20 years until retirement, transferring CAD to USD and starting long term positions in US stocks, yea or nea??? I should have explained my question a little better, I'm just getting tripped up in my own mind with the low dollar.


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## none (Jan 15, 2013)

A very important and difficult lesson to learn in investing is to only give attention to things you truly know and ignore the things you cannot control or predict.

Do you, or anybody, know which way currency is going to go? NO. Those that tell you they do are shills and liars. The CAD dollar may go up it may go down. It's unknowable so try not to focus on it.

The Canadian market sucks and the US one MAY do better, however that is also speculation. 

Two things you do know:
1) International exposure is important and very beneficial for returns and risk management;
2) MERs for US ETFs bought in US$ are generally quite a bit lower.

That's it. Exchange rate is meaningless, don't let it distract you.


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## NorthernRaven (Aug 4, 2010)

Look at it this way. Say you have C$2000 to invest. You convert it to USD at 75 cents, and get USD $1500. It earns 10% over some period, say two years. You now have USD $1650. You convert it back to CAD at 75 cents, and you have $CAD 2200.

Now do the same thing with the dollar at par (1.0). The $C 2000 becomes $U 2000, earns 10%, becomes $U 2200, and converts back to $C 2200. As long as the exchange rate is the same on entry and exit, it doesn't matter what it is, assuming you see the same return in the US investment. And it can bounce around as much as it wants while you are invested in the US, as long as it returns to the starting price when you exit.

The trick is when the entry and exit are different. If you buy at a high CAD exchange and sell at a lower one, you make additional return on the forex gain. If you buy low and sell high, you lose, offsetting or erasing the regular return depending on the relative size of each. That's what currency hedging in Canadian-based US equity ETFs is designed to avoid. When I bought my chunk of US-denominated equity ETF, the dollar was close to par. The general consensus seemed to be that the currency-hedged equivalents sold by Canadian providers sort of sucked - in practice the hedge didn't work very well. Given the limited upside and more likely downward path of CAD, hedging didn't seem to make sense. There was also an opinion that currency volatility might actually be a good thing for a longterm passive investor - it would be negatively correlated with many of the other asset classes and would help diversify the portfolio.

For a time when the dollar is low (and it is only low-ish right now; I remember when it flirted with 60 cents early in the century) you'd want to think about it more. If you are investing for the long term, then presumably you'll want to repatriate into CAD towards the end of your horizen (retirement, etc). Buying at current rates, you'd likely be able to find a time in the last few years where the rate was close enough to not to be a significant factor. Down a lot lower, or with a short investment period, you'd probably want to look into those hedged funds, and whether they can actually deliver on their promise to cleanly provide you with the underlying US return.


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## HaroldCrump (Jun 10, 2009)

Gimme the Green said:


> Sorry, I should clarify. I have no interest in playing the currency. My question relates to the average joe just wanting to buy some US dividend paying stock to use towards retirement savings. So somebody today, 20 years until retirement, transferring CAD to USD and starting long term positions in US stocks, yea or nea???


If that's your time horizon, then ignore currency movements.
Buy the stock based on its own merit.
As we have all seen last week, short term currency movements can be _extremely_ volatile & unpredictable.

Don't make investing any more complicated by trying to predict currency movements 20 years out.


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## Gimme the Green (Feb 4, 2014)

NorthernRaven said:


> Look at it this way. Say you have C$2000 to invest. You convert it to USD at 75 cents, and get USD $1500. It earns 10% over some period, say two years. You now have USD $1650. You convert it back to CAD at 75 cents, and you have $CAD 2200.
> 
> Now do the same thing with the dollar at par (1.0). The $C 2000 becomes $U 2000, earns 10%, becomes $U 2200, and converts back to $C 2200. As long as the exchange rate is the same on entry and exit, it doesn't matter what it is, assuming you see the same return in the US investment. And it can bounce around as much as it wants while you are invested in the US, as long as it returns to the starting price when you exit.
> 
> ...


Thanks for the reply. This is exactly what I was trying to tell myself.


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## Gimme the Green (Feb 4, 2014)

none said:


> A very important and difficult lesson to learn in investing is to only give attention to things you truly know and ignore the things you cannot control or predict.
> 
> Do you, or anybody, know which way currency is going to go? NO. Those that tell you they do are shills and liars. The CAD dollar may go up it may go down. It's unknowable so try not to focus on it.
> 
> ...


Thank you,


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## NorthernRaven (Aug 4, 2010)

Here's some references on currency hedging in ETFs:

Why currency hedging doesn't work in Canada - Canadian Couch Potato

The Impact of Currency Returns - BMO

The U.S. Currency Hedging Decision - PWL Capital

Currency-Hedged S&P500 Funds: The Unsuspected Challenges

ETFs in depth - advisor.ca

The Smart Way to Invest Across the Border - Globe and Mail

Investors revisit hedging as dollar weakens - Financial Post


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## uptoolate (Oct 9, 2011)

Is the Canadian dollar low? Does that mean it is time to repatriate all my USD holdings? Sometimes it seems that we have such short memories. From 1992 to 2005 it was lower than it is now. Nadir near 62 cents. I remember it well as I was lucky enough to be getting paid in USD at the time. There are good reasons to buy US stocks and US ETFs. If these reasons apply to you then I would go with ignoring the exchange rate for reasons well stated above.


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## Synergy (Mar 18, 2013)

Buy a few Canadian stocks that payout distributions in US$. That's one way to avoid currency conversion while accumulating a position in US$'s.


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## Rusty O'Toole (Feb 1, 2012)

I changed my account to all US dollars last fall. I was adding some capital and noticed the C$ was in a down trend. If the trend reverses I will consider changing to Canadian $ and buying Canadian stocks.


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## Eder (Feb 16, 2011)

It is pretty easy to gain plenty of exposure to the USD buying stocks listed on the TSX and not having to go back & forth with USD to CAN etc.


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## NorthernRaven (Aug 4, 2010)

Eder said:


> It is pretty easy to gain plenty of exposure to the USD buying stocks listed on the TSX and not having to go back & forth with USD to CAN etc.


Do you mean Canadian companies that do a lot of business in the US? Or Canadian-based and $CAD-denominated ETFs that track something like the S&P 500? For the latter, you still are exposed to currency fluctuation. Imagine CAD at 50 cents on the US dollar (0.50). A fund owns US $10,000 of stocks, and is thus worth $CAD 20,000. Then, with all stock prices remaining the same, CAD appreciates back to par (1.0). Now your fund is only worth $CAD 10,000, because of the currency movement. That's what the hedging is supposed to eliminate - perfect hedge would just have provided the underlying return (in this case 0%), and the fund would still be worth $CAD 20,000. Of course, the hedging is going to be less than perfect to a greater or lesser degree, and even if it was perfect, there would be a cost to doing it, providing a small drag by itself.

If the former (buy Canadian companies with US exposure), that's a different kettle of fish from participating in the US market's return.


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## Gimme the Green (Feb 4, 2014)

Synergy said:


> Buy a few Canadian stocks that payout distributions in US$. That's one way to avoid currency conversion while accumulating a position in US$'s.


So How does that work in Questrade? Will they convert the USD dividends into CAD or will they just leave the dividends as they are on the USD side?


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## Hiitsme (Jun 14, 2012)

The currency drop in itself is a concern. Combined with a 6 year run-up in US stocks and I'm out for now.


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## Eder (Feb 16, 2011)

NorthernRaven said:


> Do you mean Canadian companies that do a lot of business in the US? Or Canadian-based and $CAD-denominated ETFs that track something like the S&P 500?


I did state "stocks" in my post. It is pretty simple to gain Euro exposure as well with out leaving the TSX.


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## Underworld (Aug 26, 2009)

Very good question and answers. I had the same question in my head today.


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