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What to do with the weak dollar

With the dollar hovering around 75 cents U.S., advisors need to figure out how currency fluctuations may or may not impact their clients.


Date: December 8,2015

It’s been a rough year for the Canadian dollar due to plummeting oil prices and a stronger greenback.

The loonie is currently sitting at around 75 cents compared to the U.S. dollar, and some analysts expect it to decline further.

For many Canadians, the depressed loonie could put a crimp in both their travel and savings plans. (In fact, travel to the States is down 20.7 per cent year-over-year, according to Statistics Canada.)

It’s a tricky situation for advisors and their clients – how do you create a plan that can ride out a currency downturn and also cope with daily fluctuations?

The first thing to remember is that we’ve been here before, says Aimé Bwakira, an Institutional Portfolio Manager at Fidelity Investments.

“The Canadian dollar has experienced weakness in the past,” he says. “But over the long term, currencies tend to be a wash – we call it a zero-sum game.”

Struggling snowbirds

One group that’s feeling the dollar drop is snowbirds who may have planned to use a certain amount of money over a six-month visit, but could now end up spending much more in Canadian-dollar terms.

Dan Hallett, vice-president at HighView Financial Group, has a retired friend who relies on his Canadian savings to fund his U.S. lifestyle.

“Unfortunately, his cost of living has increased significantly over the past year,” says Mr. Hallett.

He suggests that snowbirds hedge this type of exposure by keeping U.S.-denominated cash to cover known expenses.

However, neither sunseekers nor their advisors should be trying to make a call on where the loonie is headed. Buying and holding greenbacks – and then spending them in the States – takes market timing out of the equation.

“It’s preferable to manage currency risk in a way that relieves you of the need to speculate on the direction of currencies,” says Mr. Hallett.

But even though travel costs may be higher, don’t throw out your clients’ financial plan, says Scott Plaskett, CEO of Ironshield Financial Planning. In his experience, snowbirds are aware that their costs are greater when converted into Canadian dollars, and they adjust accordingly.

“They adapt,” he says. “Maybe they change the golf course they play at. They still play golf, but they go to the one that costs less.”

Impact on investing

Investors who have always held a diversified portfolio would have benefited from a falling dollar, says Mr. Plaskett. If someone bought American investments when the greenback was on par with the loonie, then those American assets would have risen in price purely due to the currency drop.

But what about now? If a client wants to buy U.S. investments today, then they need to know that their portfolio could lose money if the loonie rises. Then again, the Canadian dollar could keep falling, too.

“Now you’re starting to decide whether or not you’re going to allow currency fluctuations into the decision-making process,” says Mr. Plaskett. “Who’s to say the dollar is going back up to par? That’s a currency call, but you win some and you lose some.”

An advisor could buy hedged products or create a hedge on their own on those U.S. investments, but hedging does come at a cost, he says. He rarely uses hedges, in part because he thinks it’s too difficult to make a currency call, and fluctuations tend to balance out over time.

“Over about a seven-year period, the fluctuations equal things out,” he says

Long-term thinking

Since forecasting the exchange rate is notoriously difficult, it’s better to stay focused on the long-term investment or financial plan and not obsess over currency, says Mr. Bwakira.

“It’s only a piece of the puzzle when building a well-diversified portfolio,” he says. “You want to be diversified across geographic regions, asset classes and sectors, with currency being one element to consider.”

Ultimately, getting the asset allocation right is more important than worrying about the loonie’s ups and downs.

“Diversification is ultimately the best defence for currency fluctuations,” he says.

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