The CAD vs USD

How cool is it to be a Canadian these days?  I mean, we’re weathering the economic storm as well as any other G8 country, our banks are the envy of the world, and our dollar has been trading at par with the US Dollar for roughly three years now.  I find the whole idea of an equivalent exchange rate very appealing to most Canadians in a patriotic sort of way.  After all, if you live in Canada and rarely travel outside of it, you probably don’t notice the effects of the changing exchange rate much at all.  Sure, a few luxuries might cost a little more, but it won’t be anything noticeable.  Businesses and people that live near the USA border however, notice some fairly substantial differences in their life as our currency floats higher or lower against the USD.  I grew up in a Manitoba border town.  Much of our shopping was done “across the line,” and the economies of the area were a very international mixture.  I even lost my hockey team (the Winnipeg Jets… who have since returned, thank god) in large part because of that dastardly exchange rate.  So I know my exchange rates pretty well.

Being The Little Brother Sucks Sometimes

Two things that I believe most Canadians don’t realize in light of the last three years is that the Canadian dollar is artificially high right now, and that it isn’t good for the long-term health of our economy.  Our trade relationship with the USA is still the biggest in the world.  A few years ago (I couldn’t find anything to verify if this was true any longer) my political studies professor shocked us when he said there was more trade between the Detroit/Windsor port of entry than between any two countries in the entire world!  That’s crazy when you think about it.  Over 80% of Canada’s population lives within 100 miles of the USA border and according to The World Factbook in 2007 over 84% of our exports go to our big brother to the south, and we receive over 56% of our imports from them.  Long story short, we need the USA… a lot!  When the dollar goes up, it definitely appeals to our “little brother” complex and it feels like we’re punching above our weight.  It’s also nice to go on a shopping trip and get a lot of bang for your loonie/greenback.  In the bigger picture though, a higher dollar means that we can’t sell as many exports to the American consumer (the engine of the world economy) and with more and more “buy American” laws coming into play (despite their questionable legality), this is going to put a serious dint in our economy.

Liquid Gold? I’d Rather Have Real Gold!

We haven’t yet noticed this dint because we are awash in commodity and energy dollars.  Our oil and other natural resources have given us some huge advantages and have allowed us to show strength at a time when few countries appear to have any.  Eventually this cycle will go back around as it always does and our economy that is heavily dependent on petro dollars will shrink back to its average, while the American one will likely leap to the forefront again if it can ever solve its political gridlock problem.  Most analysts I’ve read, and a brief look at that statistics since 1971 (when the USD allowed itself to start “floating” independent of the gold standard), reveals that our natural exchange rate is likely somewhere between 80-85%.  When you look at the relative size of the economies involved this seems fairly logical.

As Close To a Sure Thing As You’ll Get In Investing

So, if you’re like me, you’re probably wondering how to take advantage of this unique exchange rate situation right?  Well, the first thing you can do is look seriously at cross border shopping.  The Canadian Border Services Agency (CBSA) allows you to head down to the states for 48 hours and return with $400 worth of goods for each person in your vehicle tax- and duty-free.  If you know anyone that smokes or drinks then the sin taxes you save on those products alone can be worth a short jaunt.  The far more lucrative option that I would recommend is to invest with the idea that the CAD is extremely likely to sink back to its average over a long enough time horizon.  I wouldn’t try to speculate when this change will take place, but when you consider the size of our respective economies, and the cyclical nature of commodity prices, I think the eventual return to the mean is a near certainty.

Those Yankees Sure Do Fees Right

Instead of merely trying to make money off of straight currency conversion, I would use this opportunity to add some non-hedged American investments to my RRSP account (where their withholding tax won’t hurt you).  I personally love the Vanguard low-cost ETF series.  It allows you to track huge segments of the American or world markets for extremely low fees (probably 1/40th of what your mutual fund charges).  By purchasing a basic Vanguard ETF product form your discount brokerage you should see a nice little capital gains run in the long-term (I still believe the USA will rise again, stronger than ever), but you will also likely gain when you eventually sell the ETF and convert the currency back into Canadian funds again.  Right now there are a few brokerages that allow USD holdings and at par conversions within RSPs.  Off the top of my head I know that Questrade, Qtrade, and RBC Direct Investing offer these advantages.  These minor currency exchange fees used to eat into returns big time, so it is definitely worth looking into if you plan on taking advantage of the current economic situation with non-hedged investments.