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How Currency Fluctuations Impact Canadian Investors – How Currency Fluctuations…



How Currency Fluctuations Impact Canadian Investors – How Currency Fluctuations Impact Canadian Investors For many Canadians currency movements are an everyday part of life. When the Canadian dollar is strong it means that going south of the border is cheaper. Whether its a vacation in Hawaii or a shopping spree in New York City a strong Canadian dollar can buy more in terms of U.S. dollars. Likewise a weak Canadian dollar can buy fewer U.S. dollars meaning that travel shopping and other expenses in U.S. dollars are more expensive. The Same Effect The impact of currency fluctuations isnt limited only to foreign purchases. In fact as todays infographic from Fidelity Investments Canada shows these same fluctuations can also affect the performance of your portfolio. Why is that the case? Many Canadian portfolios have exposure to American-listed companies such as Apple Wells Fargo Tesla or Johnson & Johnson. As a result fluctuations in the USD/CAD rate can have a profound impact on how these investments perform in Canadian dollars. How Does This Work? Heres an example of the impact of currency in action: A Canadian investor puts $100 CAD into a fund that buys U.S. stocks At the time of investment $1 CAD buys $0.80 USD After exchange $80 USD is invested in the U.S. market The U.S. market goes up 10% in one year and is now worth $88 USD However over the year the exchange rate changed to $1 CAD per $0.85 USD Converted back to Canadian dollars at the new rate the $88 USD is now worth $103.52 CAD which is just a 3.5% gain in domestic Canadian currency In the above case a strengthening Canadian dollar ends up dampening the returns coming from the U.S. market. In contrast if the exchange rate went the other direction meaning Canadian dollar was weakening any returns would actually amplify. Long-Term Planning If currency fluctuations can have a substantial impact on investments what does this mean for portfolio construction and assessing risk? There are two main schools of thought on this: Hedged: Some funds use a hedging strategy to try and cancel out any currency fluctuations. Ideally the end result of this would be representative performance of the U.S. market. Unhedged: This strategy does not try to anticipate currency fluctuations since the long-term effects of currency movements tend to even out over time. According to Fidelity Investments Canada over the 20-year period of November 28 1997 to November 30 2017 the impact of currency fluctuations on the S&P 500 had a difference in annualized returns of 0.5%. In other words U.S. dollars invested in the S&P 500 had a 7.2% return while Canadian dollars invested in the same stocks had a 6.7% return after adjusting for exchange rates. Get your mind blown on a daily basis: Thank you! Given email address is already subscribed thank you! Please provide a valid email address. Please complete the CAPTCHA. Oops. Something went wrong. Please try again later. The Money Project Embed This Image On Your Site (copy code below): Courtesy of: Visual Capitalist The post How Currency Fluctuations Impact Canadian Investors appeared first on Visual Capitalist.


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