Interest rates in the United States are higher than they are in Canada, and therein lies an opportunity for savers and investors parking cash.
Pick a U.S.-dollar account and you earn substantially higher returns. A quick example: EQ Bank offers 3-per-cent interest on its U.S.-dollar account and a 1.25-per-cent base rate on savings in its regular account. One more example: The RBC Investment Savings Account, offered to investors, pays 2.3-per-cent interest on Canadian-dollar deposits in its Series A version and 3.9 per cent for U.S. dollars.
With Canadian interest rates in decline from the peaks of a few years ago, these rate differentials are noteworthy. If you’re tempted, be sure to weigh the currency risk.
While the Canadian dollar has been in a long-term decline against the U.S. dollar for more than a decade, there has been a modest reversal of this trend recently. If you own U.S. dollars or securities, your holdings gain value when our dollar falls against its U.S. counterpart. When our dollar has the upper hand, like now, the value of U.S. holdings erodes.
Predicting currency moves is brutally hard, but continued strength in the Canadian dollar could offset higher U.S. rates, or even leave you worse off. Recently, our dollar has gone from roughly US68 cents to around 72 cents, even amid growing evidence that the trade war has hurt the Canadian job market and broader economy.
The currency story today is more about global investors souring on the U.S. dollar than a positive vibes about the Canadian buck. The recent downgrading of the U.S. credit rating by Moody’s reinforces the view that there are risks in holding American assets. Meanwhile, Canada continues to have a top credit rating.
U.S.-dollar deposits continue to have a role for people who need to spend U.S. dollars in the future. If you see yourself converting your U.S. deposits back to Canadian dollars at some point, then mind the currency risk.
One final note about U.S.-dollar deposits at banks: Canada Deposit Insurance Corp. covers foreign currency deposits to the usual limit of $100,000 in combined principal and interest per eligible deposit. If you stay within CDIC limits, your U.S. dollar bank deposits are as safe as your Canadian dollars.