# US funds and opportunity costs. Input sought.



## Banalanal (Mar 28, 2011)

Suppose a Canadian person has funds in US dollars. It is likely those funds will be invested in equities denoted in US currencies over the next few years when opportunities arise. The person earns a fraction of a percent in the meanwhile, from interest in a US savings account. The person could earn 1.5% more in a Canadian savings account. The money can be exchanged between the two currencies for little fees by buying inter-listed stocks and channeling them over (Norbert's gambit). 

Given the potential interest earned at the higher rate in a Canadian savings account is significant, does it make sense to exchange the US funds to CDN? Factors could be how the currencies will be valued against each other over the next few years. And any unseen opportunity costs, or risk exposures.

Thanks for the input.


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## HaroldCrump (Jun 10, 2009)

You are taking on currency risk by doing this.
CAD could depreciate by more than 1.5% during this time, wiping out your yield spread.

CAD is $0.952 at this time.
A 1.5% depreciation means CAD down to $0.937.
That is not beyond the realm of possibility, given the volatility in energy and materials prices (highly correlated to the CAD).


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## fatcat (Nov 11, 2009)

i agree with harold
why expose yourself to currency risk which can wipe out any extra interest ?

why not buy us denominated investments that you can simply add monthly or whenever cash appears ?
like td e-series which you can buy in us denominated funds
you can add for no fee

or dripping ?


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## Banalanal (Mar 28, 2011)

Well the thing is, nobody knows what the currencies are going to do. Yet it is a guarantee I can earn a higher interest switching the funds to CDN$. If it is 50% likely that the US$ will appreciate and 50% likely the US$ will depreciate, my risk is not missing out on a more favorable exchange rate, it is missing out on current interest yield. Correct?


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## fatcat (Nov 11, 2009)

Banalanal said:


> Well the thing is, nobody knows what the currencies are going to do. Yet it is a guarantee I can earn a higher interest switching the funds to CDN$. If it is 50% likely that the US$ will appreciate and 50% likely the US$ will depreciate, my risk is not missing out on a more favorable exchange rate, it is missing out on current interest yield. Correct?


i am lost ... why not just buy us dollar investments now ? ... put the money to work ? ...

if you change into CAD and incur a cost and then change back to USD, you are assuming that you will make more in extra interest than you will lose in currency exchange, correct ?

so you are betting on the loonie since if the loonie drops you will need to have made a lot of extra interest to make the exchange into CAD and back to USD worthwhile, right ?

why not just buy FXC (http://www.currencyshares.com/products/overview.rails?symbol=FXC) and stay in us dollars ? ... you are betting on the loonie still

either i am missing something or you are making a simple problem more complex


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## james4beach (Nov 15, 2012)

FXC holds its money in uninsured London bank accounts. Last time I checked, they are not backed by any kind of government insurance and constitute an unsecured loan to the bank with full counterparty risk. I do not recommend currencyshares.

Reality is that if you're holding USD in US$ form and want it cash-like, there are very few options for how to store it safely. I'm presuming the OP wants to keep it cash-like and not 'stored' in an investment. As fatcat points out, keeping the money in an investment is another option here.

If someone came to me and said, I've got a significant amount of cash, $10,000 USD that I may deploy in my brokerage and I'm debating whether to store it in USD or CAD for possibly a few years... I would most definitely tell them to convert it to CAD, withdraw it from the brokerage, and keep it in a CDIC insured savings account. Yes there's a forex hit and yes exchange rates will fluctuate, but it's also a safe way to store the money.


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## Banalanal (Mar 28, 2011)

The reason I am not investing it now is because I choose to invest in equities, and currently I do not see the yield I am looking for. So I choose to wait, hold cash, until that opportunity arises. It could be tomorrow, it could be 3 years. Currently, the money sits in a Royal Bank, US$ savings account at pretty much no interest. I am thinking of exchanging to CDN$ and holding it in Accelerate Financial. They offer one of the highest savings rates in Canada at 1.8% and all deposits are insured without limit, by the province (or perhaps fed, one of the two). Interesting to note, RBC only insures funds up to 100k. I am not concerned about exchange fees. I have used Norberts gambit several times and it is pretty smooth.

I welcome more input. Still undecided. I suppose I should take the 1.8% in CDN, given the guaranteed rate and the uncertainty of how the US/CDN dollars will compare.


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## james4beach (Nov 15, 2012)

Banalanal said:


> Currently, the money sits in a Royal Bank, US$ savings account at pretty much no interest.


If you're storing it in a bank in USD, then your money currently does not have any CDIC insurance. If we're talking about any substantial money here I strongly recommend keeping it in CAD to benefit from deposit insurance. I think it's crazy to keep money in a bank without deposit insurance. The CDIC web site states: "CDIC does NOT insure any accounts or products in U.S. dollars or other foreign currency."


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## Banalanal (Mar 28, 2011)

It's very significant funds and I did not know that. Thanks for replying. Perhaps that is the deciding factor and I need to exchange the funds and deposit in a credit union until I decide which US equities I will invest in. If anyone else has any more thoughts, please don't hesitate.


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## fatcat (Nov 11, 2009)

i'm surprised that james hasn't told you that credit unions have lesser quality deposit "guarantees" since they are provincial guarantees only
why not just norbert it over and pop into a royal hisa (assuming you have less than 100K, if you have more then you can ladder short term GIC's with different lenders)


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## HaroldCrump (Jun 10, 2009)

Leaving aside the issue of yield spread (which IMHO is not a significant factor in this decision, but that's just me), your risk in keeping this in USD is one of two following scenarios:

- The Royal Bank of Canada (RBC) not being able to honor your uninsured deposit
- A severe and dramatic depreciation of the US$ leading to your deposit being worth much less

How likely are either of the two above scenarios.

On the other hand, your risks in converting to CAD to get CDIC insurance are:

- Trading costs each time you convert back and forth (even gambit has a cost, right)
- 1.5% or more depreciation of the CAD vis-à-vis USD
- Lower quality of the institutions offering higher rates on CAD deposits

To me, this is a case of known and likely factors vs. highly unlikely risks.


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## james4beach (Nov 15, 2012)

fatcat said:


> i'm surprised that james hasn't told you that credit unions have lesser quality deposit "guarantees" since they are provincial guarantees only
> why not just norbert it over and pop into a royal hisa (assuming you have less than 100K, if you have more then you can ladder short term GIC's with different lenders)


True that credit unions have slightly weaker deposit insurance as they're not federally backed. For some thoughts on the deposit insurance tradeoffs you may want to read this from the lunatics at greatponzi. Personally I keep money both in big banks and credit unions.

I strongly recommend putting the cash somewhere it has deposit insurance (whether credit union guarantee or CDIC). Once in CAD you could put it into a high interest savings account or the royal HISA as fatcat said - I would use one of the big banks or a reputable credit union, but not one of the specialized/riskier outfits like hometrust, B2B, peoples etc.

I don't see the situation the same as HaroldCrump. You know how we all talk about "bail ins" and that kind of unforeseen problems with the banks, like the problems experienced in Europe? Well bail-ins aren't a problem provided you have insured deposits. For me, personally, that trumps the 2% forex conversion loss.

As for the USD potentially depreciating, it most certainly could. Currencies are volatile. The USD declined 25% against the CAD (that's huge!!) between March 2009 and July 2011. If that isn't "A severe and dramatic depreciation of the US$" then I don't know what is and it was very recent. Then again the USD could also rise a lot from here so that's a pure gamble. Currencies are volatile.

Since you're talking about a significant amount of money, would it be worth doing a bit of both? Keep half in USD (uninsured) and convert half to CAD so that it becomes an insured deposit earning interest, at either a big bank or credit union.


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> As for the USD potentially depreciating, it most certainly could. Currencies are volatile. The USD declined 25% against the CAD (that's huge!!) between March 2009 and July 2011. If that isn't "A severe and dramatic depreciation of the US$" then I don't know what is and it was very recent.


But his US$ are intended to be spent in the US - i.e. by buying US$ denominated stocks.
If the cash is kept, and spent, in the same currency then there is no currency risk.
I see no point in taking on currency risk as long as he wants to spend the US$ buying US stocks.

I know about bail-ins, but I am not too worried.
The problem in Europe is that any individual country cannot print EURs, but we can (print CAD).


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## james4beach (Nov 15, 2012)

HaroldCrump said:


> I know about bail-ins, but I am not too worried.
> The problem in Europe is that any individual country cannot print EURs, but we can (print CAD).


If you haven't noticed, the FDIC down south has had to pay out tons of money since 2008 to cover various failed banks that couldn't make good on their deposits. What if you were an American with uninsured deposits... how would that have worked out for you? After all the USA can print infinite amounts of dollars, right?

The ability to print money (say US dollars) just means the FDIC has deep pockets via the printing press... that's good, but your deposit still has to be FDIC insured in the states, or CDIC insured here.

Uninsured deposits are just asking for trouble. Uninsured depositors lost money in Europe, they lost money in America, and they will probably lose money in Canada too.

The government has made it clear what you have to do if you want to benefit from the government/printing press... you have to have an insured deposit.


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## Banalanal (Mar 28, 2011)

Have those guarantees failed in Canadian Credit Union history? Have any of those banks become insolvent? I was on the phone with Accelerate Financial today and was told it's never happened in MB, for what that's worth. RBC only insures up to 100k, and it is more than that. And the return on a HISA is less than a place like Accelerate financial by around .5%. So two good reasons to avoid RBC. I'm not sure the return on GIC's is better than a credit union savings account, especially given I need to be able to access the cash on a day's notice...

Thanks again.


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## fatcat (Nov 11, 2009)

i believe that member banks contribute to the fdic fund to bailout other banks (but i am not positive on this)
when i lived in san diego, i banked at a bank that went under
i showed up one morning and there was a small note on the door that said in effect "this bank has failed and is being temporarily run buy the fdic until a buyer can be found"
i went in and did my business
other than the small sign on the door, you wouldn't know anything had happened

you can get a cashable gic right now at 1.70 percent
you can get a cdic insured hisa at canadian direct for 1.9
either method gives you immediate access to funds

again, i might be a little slow here, but if you have us dollars and your stated intention is to buy us equities, why not, you know, just start buying us equities ?


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## humble_pie (Jun 7, 2009)

fatcat said:


> again, i might be a little slow here, but if you have us dollars and your stated intention is to buy us equities, why not, you know, just start buying us equities ?



i'm slow too. I mean, he said he wants to wait while the US market corrects down. This might take 3 years, he said.

so i find myself thinking OK he's made a strong bet, why not continue with it? US markets are going down? buy US puts! short US indexes! gosh, even short US stocks! why be dithering over nano-percentages of interest rates at godforsaken provincial credit unions in canada?


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## james4beach (Nov 15, 2012)

I agree it's a perfectly good option for him to deploy the money into US markets, if that's the plan. Then again I understand the desire to sit on the sidelines in cash form.

One alternative is he could deploy the money into an ETF such as SHV. This is a short duration treasury fund so it's like holding t-bills, and natively USD. It yields nothing but is safe (in treasuries) so it solves the problem of the uninsured deposits and converting to CAD. Holding the money in SHV is safer than just letting the US dollars sit there.

Either way I would not keep the money in US$ just sitting there as cash. Options seem to be

a) Deploy it into a US investment now as fatcat and humble_pie are saying
b) Buy SHV for US$ cash storage in safe treasuries (yields nothing)
c) Convert it to CAD make it an insured deposit of some sort (slightly higher yield)

If you really want to sit in cash, safely, and don't want FX conversion then SHV may be the best option. I wouldn't get too caught up on yield either. Even if you get 1.8% in a CAD savings account it's basically going to round to zero after taxes plus there's all those FX conversions fees.


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## james4beach (Nov 15, 2012)

On the safety angle, look at it in terms of who you are lending the money to

1. (Currently) US$ cash in RBC -- you're lending to RBC, without deposit insurance
2. If converted to CAD deposit -- you're lending to a bank, with deposit insurance (CDIC = government)
3. If invested into SHV -- you're lending to the US government and they guarantee repayment

So only #2 and #3 have government guarantees behind them.


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## Banalanal (Mar 28, 2011)

Awesome dialogue. Thanks guys. I am not buying US equities now because I don't see the right earnings yield or discount to assets with the margin of safety I am looking for. I may tomorrow. Or it may take years. 1.5% difference in yield is significant over the course of the year. I am not worried about exchange fees as Norbert's gambit costs 10$ multiplied by a few transactions and the brief exposure to TD or some such equity during the time I buy and sell the stock.

I will probably go with Accelerate Financial. Guaranteed by the province of MB for whatever amount you put into it. A Credit Union has never gone under in MB. 1.8% yield. I will look into GICs that let me cash out at a moment's notice as well, and pick one of the two options.

Thanks.


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## Sampson (Apr 3, 2009)

I'm 100% with Harold.

You simply have to make a call.

Will the CAD devalue more or less than the yield spread before you need the money to invest. We are talking about 1.5-2%. Remember as recently as 2007-2008. I made the mistake of not holding onto more USD. We went from 1.10 to 0.78 in one year. One Year!!!

This meant that even if you were brave enough to buy the American banks bank when everyone thought the world was going to end, you would have to do so with a 30-40% premium compared to if you had simply the USD.


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## Banalanal (Mar 28, 2011)

Yes but there is no way to know what the currencies are going to do. Your argument works just as easily going the other way. The CDN$ has also appreciated a very great deal in a relatively short amount of time. Anyone that claims they know the US$ will appreciate greatly in the next few years should be making very large bets on it. So if those two points negate each other, then I have to chose the option with the least risk and greatest yield. I believe, after our discussion, that would be an insured CDN savings account. Right?


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## HaroldCrump (Jun 10, 2009)

Banalanal said:


> I have to chose the option with the *least risk and greatest yield*. I believe, after our discussion, that would be an insured CDN savings account. Right?


Depends on what you consider *risk*.
To me, the risk in this case is the currency risk simply to chase an extra 1.5% yield.
You have USD, you need USD in the near future, ergo to me, why take currency risk.

As you know, I am sure, _"least risk and greatest yield"_ are not friends with each other ;o)


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## Sampson (Apr 3, 2009)

Banalanal said:


> Yes but there is no way to know what the currencies are going to do. Your argument works just as easily going the other way.


This is not what I mean at all. Calculate your opportunity cost.

Will the returns you make by waiting and making the investment into US equities outpace the 1.5% yield?


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## Banalanal (Mar 28, 2011)

HaroldCrump said:


> You have USD, you need USD in the near future, ergo to me, why take currency risk.


Because there is no deposit insurance on my US funds and no yield.


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## Banalanal (Mar 28, 2011)

Sampson said:


> This is not what I mean at all. Calculate your opportunity cost.
> 
> Will the returns you make by waiting and making the investment into US equities outpace the 1.5% yield?


By waiting and buying specific equities at a later date, I should have higher yield than buying them now. And your question implies I am considering choosing to invest in US equities later OR taking a 1.5% yield now. But I am considering doing both. 

I think the question you meant to ask (or maybe not), is will the return I make investing in US equities later, outpace the US dollar appreciating vs the CDN dollar. That is the main yield question. And to that I don't know. I argue nobody really does.


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## james4beach (Nov 15, 2012)

Banalanal said:


> Because there is no deposit insurance on my US funds and no yield.


Going with SHV (keeping it in USD) would solve half of the problem... safety of the cash. With SHV the money would be government guaranteed and you wouldn't need deposit insurance.

Perhaps you shouldn't get too caught up on the yield issue. Is 1% to 2% interest really worth chasing? You're going to pay tax on it too.


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## Sampson (Apr 3, 2009)

Banalanal said:


> I think the question you meant to ask (or maybe not), is will the return I make investing in US equities later, outpace the US dollar appreciating vs the CDN dollar. That is the main yield question. And to that I don't know. I argue nobody really does.


Thanks for rephrasing, exactly.

So depending on the actual opportunity cost (are you talking about missing out on hundreds, thousands, tens of thousands of dollars), of that 1.5% yield spread, I would say forget it. Anything worth less that several thousands dollars incurs that currency risk - and given how risk (variance) of CAD vs USD over the past 10 years, that risk can easily amount to more than a few thousand dollars.


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## Banalanal (Mar 28, 2011)

I phoned the local Credit Union who called the regional manager and it was assured to me that all deposits, CDN$ and US$, are insured for the full deposit amount plus interest. I was surprised to hear that. That will have to be my option for some US funds.


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## james4beach (Nov 15, 2012)

Well that's interesting that they insure US$ amounts. I'm surprised too!


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## Banalanal (Mar 28, 2011)

This may have been mentioned but it's also good to know that in RBC, you can invest in their RBF2020 insured savings account via their direct investing discount brokerage side. They have 4 of those funds and each are insured up to 100k separately. So another option to hold CDN$ funds at a big institution while receiving insurance and a small yield.


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