Ryan Remiorz
It's rare to find investments offering international diversification and a good chance of a profit with low risk. But the opportunity exists for anyone in Canada with an online investing or bank account.
The trade is very simple: Loonies for U.S. dollars, transferred with the click of a mouse between accounts. The strategy takes advantage of the current strength of the Canadian dollar to lock in today's attractive exchange rate.
The swap assumes that the Canadian dollar is unlikely to trade above the greenback over the long term - a fairly safe assumption, based on history. If the Canadian dollar does fall back, holders of U.S. dollars will make an immediate profit in loonie terms. If not, the investor can still use the U.S. funds to buy U.S. assets or make purchases in the U.S.
Either way, you're hedged against the possibility of an abrupt downward move in the loonie. Most market watchers forecast a stable environment for Canada's currency over the next 12 months. But any surprises will almost certainly send it down.
"The upside to our dollar is limited," says Roland Chalupka, chief investment officer and portfolio manager with Fiduciary Trust Co. of Canada, adding that the loonie will probably stay close to par in 2011 unless there is another international crisis.
Longer term, some indicators suggest the Canadian currency will have to lose ground against the greenback. The Organization for Economic Co-operation and Development, for instance, calculates the purchasing power parity (PPP) of the loonie at 1.14. PPPs are the rates of currency conversion that eliminate the differences in price levels between countries. Put another way, for every dollar Americans spend on, say, junk food, Canadians have to spend $1.14 to get the same amount. The OECD calculation puts the loonie's intrinsic value at just 87.4 cents (U.S.). The Canadian dollar last traded in that range between late 2008 and mid-2009.
"We believe that over the course of the next year the loonie will trade between 97 cents [U.S.]and $1.03, in a very tight range," says Larry Moser, regional sales manager with Bank of Montreal in Ottawa. "While we don't expect it to hit $1.09, as in 2007, if you believe that the dollar is fairly valued, then this could be an opportunity to simply open a U.S. dollar account, thinking the Canadian dollar will weaken, or at least not strengthen."
Currency valuations can swing quickly and unpredictably. If the greenback should fall further against the loonie, the situation presents continued buying opportunities, says Adrian Mastracci, portfolio manager with KCM Wealth Management Inc. in Vancouver. "Perhaps [stagger]the trades over a few months as a form of dollar-cost averaging," he suggests.
In the simplest case, an investor can simply hold the U.S. cash in a savings account - although interest rates may be lower than on Canadian funds - to pay for future vacations stateside. Alternatively, the cash could be directed at U.S. stocks, bonds or real estate.
One of the advantages of investing in U.S. assets today is that with the loonie seeming to have little remaining headroom, investors don't have to be too concerned about a more-expensive Canadian dollar eroding the value of their holdings. "There's less of a need to hedge your investments when you think the Canadian dollar will be stagnant or weaken," BMO's Mr. Moser says.
Loonie trade
Platforms:
U.S. dollar savings accounts. Available from Canadian banks. Funds can be moved online.
U.S. dollar trading accounts. Available from Canadian online brokerages and banks.
RRSPs:
Registered accounts cannot hold U.S. dollars. U.S. assets get valued on a daily basis in Canadian currency.
Fees:
Canadian banks may charge about 2 per cent to do a trade.
Taxes:
Some advisers say actively trading for profit books a capital gain. See a tax adviser.