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How the falling dollar impacts investors

How the falling dollar impacts investors

Posted on: January 21, 2016
Author: Gene Hochachka, Chief Investment Officer, ATB Investment Management Inc.

What impact has the declining Canadian dollar (CAD or loonie) had on Canadian investors?

We limit our comments to the loonie’s slide against the US dollar (USD) because of the latter’s prominence in investment portfolios, and also because it has risen more against the CAD than other currencies. These are two sides of the same coin, because a fall in the loonie is a rise in the USD, but the impact on investors is often clearer if expressed as a rising USD.

Viewed on this basis, the USD went from 1-to-1 in mid-2013 to 1.45 CAD per USD by mid-January 2016. The direct impact on Canadian investors was that any unhedged US equities, US bonds or even US cash in a portfolio experienced a one-time return boost of 45 per cent when converted back into CAD.

The story doesn’t necessarily end there. The USD’s appreciation had a slight negative impact on the (USD) price of some US company shares in a portfolio, for two related reasons:

  1. US companies with earnings (profits) in a foreign currency must report those earnings in USD. A higher USD means those foreign earnings are worth less and will continue to be worth less, translated into USD, than they’d have otherwise been.

  2. US companies competing with importers now face a significant deterioration in their prospects, as their costs remain the same but the costs of foreign-based competitors’ products and services are lower.

The overall net impact of a rising USD was beneficial to Canadians with US securities in their portfolio, despite these two moderating effects. However, the exchange rate cannot be viewed in isolation. Because the loonie is falling mainly due to declining oil prices and the corresponding fall in Canadian energy stocks, the benefit of a rising USD in one part of the portfolio was somewhat offset by the decline in Canadian equities in another part of the portfolio.

The information presented has been prepared by ATB Investment Management Inc. (“ATBIM”). ATBIM and ATB Securities Inc. (“ATBSI”) are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Investor Services. ATBSI is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.

This document is not, and should not be construed as, an offer to sell or a solicitation of an offer to buy any investment. This document may not be reproduced in whole or in part; referred to in any manner whatsoever; nor may the information, opinions, and conclusions contained herein be referred to without the prior written consent of ATBIM.

The information provided herein is a simplified general summary for information purposes only and is not intended to replace or serve as a substitute for professional advice. Professional tax advice should always be obtained when dealing with taxation issues as each individual’s situation is different. This information has been obtained from sources believed to be reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness.

This information is subject to change and ATBIM reserves the right to change the information without prior notice, and does not undertake to provide updated information should a change occur. ATB Financial, ATB Investment Management Inc. and ATB Securities Inc. do not accept any liability whatsoever for any losses arising from the use of this document or its contents.