Recently the weaker loonie has dominated headlines and is becoming a growing concern for many Canadians.
My team and I continuously monitor the strength of our dollar, particularly how it will fare against our U.S. counterpart, as there can be positive and negative effects on our country's economy as well as your investment portfolio.
The lower Canadian dollar will certainly be welcomed by exporters, as it makes our products cheaper for those abroad. For example, a U.S. company in 2012 would pay close to $1 U.S. to purchase a Canadian dollar's worth of goods; however, the same company now only pays around 90 cents. This of course will make our Canadian goods much more attractive to the world, as they can get more bang for their buck. Additionally, the tourism industry also benefits, as travelling to Canada will now be cheaper for Americans and many Europeans.
Although it is always good to look at the benefits, we must also pay close attention to the drawbacks. A great deal of our goods come from the U.S. and because our foreign purchasing power diminishes with a depreciating currency, we may see certain costs increase for Canadian companies. Eventually this could lead to higher prices for consumers, although these changes are typically gradual and do not happen overnight.
There are a few reasons for this shift in our currency. Firstly, we are a commodity driven country and selling resources to international consumers is one of our main sources of income. When demand falls for our commodities it also falls for our dollar, causing the price to drop. Secondly, the Canadian central bank's current philosophy is geared towards keeping interest rates low for the foreseeable future, which in turn keeps downward pressure on our currency.
I believe the Canadian dollar will continue to struggle, in fact we may see it go as low as 80 cents against the American dollar over the next 12 to 24 months. What does this mean to you and your portfolio as a Canadian investor? You'll want to ensure you have U.S. exposure in your investments in order to benefit from this move and if you have little to no U.S. stocks now, you should look to add some. Not only is the American economy and stock market outperforming ours, but they also have more companies in various sectors to choose from.
There are some Canadian companies that will do well, so don't move your entire portfolio into U.S. investments. At the end of the day, your strategy should allow you to gain exposure to where the strength lies, and right now there is strength south of the border.
Remember that you ultimately spend Canadian dollars here at home, so if the U.S. greenback gets stronger and the loonie continues to decline, the effects will indirectly affect you. In fact, you likely won't notice it from day to day.
From an investing standpoint, there is opportunity to not only make money on U.S. stocks, but also to have extra return from the exchange rate on the currency.
Lori Pinkowski is a portfolio manager and senior vicepresident, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer questions at 604-915-LORI or [email protected]. You can also listen to her every Friday on CKNW at 5:35 p.m.
