SPECIAL
REPORT
THE CANADIAN DOLLAR & FOREIGN EXCHANGE
The Canadian Dollar &
Foreign Exchange
Whether they winter in Palm Springs, transact business with American
companies or own assets south of the border, many of our clients at
Richardson GMP are exposed to the U.S. dollar. Their need for U.S. dollars
results in a close following of the Canadian/U.S. dollar exchange rate and
repeated use of foreign exchange services. The purpose of this report is to
provide our clients with a brief primer on our home currency relative to the U.S.
dollar. But we also want to have a conversation at a personal level to explain how
you are affected by the exchange rate and suggest how we at Richardson GMP
can help you exchange currency efficiently and cost effectively.
Richardson GMP
Investment Management
& Research
The publications provided through
Richardson GMP Investment
Management & Research are meant
to inform and educate our clients on
various financial topics and events by
providing a framework to help investors
understand specific financial issues
and relationships.
Foreign Exchange (FX)
Every country or trading region has its own currency – Japan has the yen,
Europe has the euro, Switzerland has the franc, South Africa has the rand,
etc. We Canadians have the Canadian dollar, or as it’s commonly known, the
loonie. We use the Canadian dollar domestically as our standard unit of wealth
which allows us to value the goods and services we buy and sell. However,
not all of our business is transacted domestically as Canadians buy and sell
globally. Such international trade results in Canadians exchanging dollars for
other foreign currencies, thus resulting in the term Foreign Exchange or “FX”
for short. Every exchange rate involving the Canadian dollar is different as every
foreign currency has a different relative value.
The most important FX rate for Canadians is the exchange rate with the
U.S. dollar as it is the most commonly used currency on the planet. It’s also
important as we transact the vast majority of our international trade with the
United States. In fact, Canada and the United States have the largest cross
border trading relationship in the world.
Written by
Gareth Watson, CFA
Director,
Investment Management Group
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THE CANADIAN DOLLAR & FOREIGN EXCHANGE
Canadian Dollars per U.S. Dollar
Canadian Dollars per U.S. Dollar
USD 1.10
USD 1.05
USD 1.00
USD 0.95
USD 0.90
USD 0.85
USD 0.80
USD 0.75
USD 0.70
USD 0.65
USD 0.60
Source: Bloomberg
The most important FX rate for Canadians
is the exchange rate with the U.S. dollar
as it is the most commonly used currency
on the planet [...] In fact, Canada and the
United States have the largest cross border
trading relationship in the world.
A floating Loonie
A detailed history of the Canadian dollar is beyond the scope of this report; however, we wanted to highlight that since
1970 Canada has had a floating exchange rate with the United States. Exchange rates can either be fixed or floating.
A fixed exchange rate is one where a country’s central bank attempts to tie its currency’s value to that of another
country. So if Canada “fixed” its exchange rate to the U.S. dollar then our dollar would move in lockstep with the U.S.
currency – if the U.S. dollar strengthened, so too would the Canadian dollar and vice-versa. However, we have a floating
exchange rate where the value of our currency is dependent on the supply and demand of buyers and sellers around
the world. When in high demand from investors, the Canadian dollar will tend to appreciate against the U.S. dollar, but
if conditions are negative then we normally see the Canadian dollar depreciate. So what variables affect supply and
demand of Canadian dollars vs. the U.S. dollar or any other currency? Let’s examine a few.
Interest Rates
If one country has a higher interest rate relative to another, that country’s currency will likely be stronger. For example,
if you could buy a Canadian bond that offered 2% or a U.S. bond that offered 10%, naturally you’d want to buy the
higher yielding U.S. bond. But in order to buy that bond you need to sell your Canadian dollars and buy U.S. dollars;
therefore, the U.S. dollar would strengthen and the Canadian dollar would depreciate. With that said, large differences
in rates could be a sign of inflation, in which case the opposite relationship is true. However, since the difference in
inflation between Canada and the U.S. is not particularly large, it tends not to influence the FX rate as much as it would
between the loonie and other foreign currencies.
Economic Growth
A strong economy normally produces a stronger currency. For example, when the Canadian economy has expanded,
our dollar has been in a better position to strengthen relative to other currencies while recessions have normally caused
our currency to decline.
Commodities
Unique to Canada and other resource based economies, when commodity prices rise foreigners buy more Canadian
dollars in order to purchase those commodities. This buying results in a strengthening Canadian dollar, which is what
happened during the last commodity super cycle from 2005 to 2012 when the loonie eventually reached and exceeded
parity with the U.S. dollar. Oil in particular has a strong relationship with the Canadian dollar in a rising oil price
environment – when oil prices rise, the Canadian dollar normally strengthens.
3
THE CANADIAN DOLLAR & FOREIGN EXCHANGE
Oil & the Loonie tend to move together
Oil & the Loonie Tend to Move Together
160
USD 1.20
140
Oil in particular has a strong relationship
with the Canadian dollar in a rising oil
price environment – when oil prices rise,
the Canadian dollar normally strengthens.
USD 1.10
120
USD 1.00
100
80
USD 0.90
60
USD 0.80
40
USD 0.70
20
Source: Bloomberg
0
2005
2006
2007
2008
2009
2010
2011
2012
WTI Crude Oil (US$ per barrel)
2013
2014
2015
2016
USD 0.60
CAD/USD
There are many other variables that influence currencies globally but we believe the three we’ve listed are the most
influential for the loonie. Other variables could include things such as political instability, sovereign debt levels, or fiscal
balances to name a few.
Is a strong Canadian dollar desirable?
No matter what you’re talking about, stronger is usually viewed as better. But is that always the case with currency? In
today’s globalized world there are both pros and cons with a stronger Canadian dollar. In particular, purchasing power
must be considered.
Pro: When the Canadian dollar strengthens, we can buy more of a foreign currency with a given amount of Canadian
dollars. This provides us with more purchasing power in foreign markets. When the Canadian dollar reached parity
back in 2007 and again after the financial crisis, Canadians crossed the border often for vacations and shopping
because a stronger Canadian dollar made U.S. goods and services cheaper.
Con: While we can buy more foreign goods and services cheaper with a stronger loonie, the opposite is true in that
Canadian goods and services become much more expensive to foreigners. Back when our loonie was US$0.62 in 2002
Canada was a big exporter because our goods were relatively cheaper to other foreign markets; however, manufacturing
has come under pressure over the past decade with a number of businesses closing or downsizing due to the stronger
Canadian dollar and the lack of competitiveness that comes with it.
So is a stronger currency better? The answer is “it depends”. It depends on who you are and how the foreign exchange
rate affects you. If you love to vacation in Palm Springs then a strong Canadian dollar is right up your alley, but if you make
furniture for export to the United States then a weaker Canadian dollar would be much more favourable for your business.
How are you affected by foreign currency exchange?
Our discussion so far has been at a macro level, but now let’s take a look at how foreign exchange rates can affect you
personally. One guarantee when exchanging currencies is that usually some institution, namely a bank or credit card
company, is making money from your transaction. This is why consumers never receive the posted FX rate on currency
exchanges. Instead the rate you pay is always just a little more expensive so that the institution doing the transaction
can make a profit. This profit is usually referred to as “the spread”. While avoiding the spread is normally impossible,
it differs depending on the transaction you decide to use as some are more expensive than others. A simple rule of
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THE CANADIAN DOLLAR & FOREIGN EXCHANGE
thumb to remember is that the more dollars you exchange at a given time, the better the exchange rate you’ll receive
and therefore the lower the transaction cost you’ll pay. It is far better financially to convert $50,000 from loonies to
U.S. dollars in one transaction if the FX rate is working in your favour instead of five separate transactions of $10,000
over time. Let’s discuss an example to illustrate how foreign exchange rates can differ.
To make things easy, let’s assume you bank with a Canadian bank and have:
•
a Canadian dollar bank account
•
a U.S. dollar bank account (domiciled with your Canadian branch)
•
a Canadian dollar credit card
•
a U.S. dollar credit card
•
a Canadian dollar Richardson GMP investment account
•
a U.S. dollar Richardson GMP investment account
Now let’s assume you have no U.S. dollars but you’re about to spend the next five months living in the United States,
how could you pay for all of your U.S. expenses and how much extra will you be charged for your FX transactions?
1. Pay with your Canadian dollar credit card
This is likely the easiest option since all you have to do is give your credit card number and the transaction is
processed. However, credit card companies generally charge expensive foreign exchange rates.
Canadian Dollar
Bank Account
Charge to you of ~3%
Credit Card
Company
Cost to you: No matter what the credit card company, most will charge approximately 3% on all your transactions.
2. Pay with your U.S. dollar credit card
To pay off a U.S. dollar credit card bill your will use money from your U.S. dollar bank account. However, you have no
U.S. dollars to start with in this example, so you will have to convert some of your Canadian dollars into U.S. dollars and
have them deposited into your U.S. dollar account. In this case the bank will do the foreign exchange and take a profit
on the transaction.
Canadian Dollar
Bank Account
Bank charges
you ~2.0 - 2.5%
U.S. Dollar
Bank Account
Cost to you: Most banks will charge approximately 2.0% to 2.5% on foreign exchange conversions.
Credit Card
Company
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THE CANADIAN DOLLAR & FOREIGN EXCHANGE
3. Pay with cash, cheque, bank draft from your Canadian dollar bank account
Whether you’re paying with a cheque or bank draft or wiring money, you still have to convert your Canadian dollars to
U.S. dollars through your bank before sending any payments as they must be made in U.S. dollars.
Canadian Dollar
Bank Account
Bank charges
you ~2.0 - 2.5%
U.S. Dollar
Bank Account
USD cash,
cheque, bank draft
End recipient of
the U.S. Dollars
Cost to you: Like before, the bank will charge approximately 2.0% to 2.5% on the conversion.
4. Pay with cash, cheque or bank draft from your U.S. dollar bank account
Just like the U.S. dollar credit card, in order to make payment you need to convert some Canadian dollars to U.S.
dollars through your bank branch in order to make payment from your U.S. dollar bank account.
Canadian Dollar
Bank Account
Bank charges
you ~2.0 - 2.5%
U.S. Dollar
Bank Account
USD cash,
cheque, bank draft
End recipient of
the U.S. Dollars
Cost to you: Again, the bank will charge approximately 2.0% to 2.5% on the transaction.
5. Pay with cash from your Richardson GMP Canadian or U.S. dollar investment account
You can convert your Canadian cash into U.S. dollars in one of two ways to avoid paying higher bank charges.
In option #1, Richardson GMP can convert your Canadian dollars with a spread between 0.3% and 1.5% depending
on the size of your transaction and have the funds wired to your U.S. dollar bank account or even a U.S. domiciled
bank account (JPMorgan, Bank of America, etc.) for an additional $25 wire charge.
However, why pay a wire fee when in option #2 Richardson GMP can convert your Canadian dollars again with a
spread between 0.3% and 1.5% and transfer those funds into your U.S. dollar investment account. From there we can
arrange an Electronic Funds Transfer (EFT) to your U.S. dollar bank account where you can cover your costs via one of
many payment methods. Take note that an EFT can only be done from your Richardson GMP account to a Canadian
domiciled account (C$ or US$) and cannot be done with a U.S. domiciled account.
Cost to you: Richardson GMP will charge approximately 0.3% to 1.5% depending on the size of the transaction.
(continued on next page)
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THE CANADIAN DOLLAR & FOREIGN EXCHANGE
5. Pay with cash from your Richardson GMP investment account (cont.)
Option 1
Richardson GMP
Canadian Dollar
Account
$25 wire fee
Richardson GMP
charges you
~0.3 - 1.5%
U.S. Dollar
Bank Account
USD cash,
cheque, bank draft
(Canadian or U.S.
domiciled account)
End recipient of
the U.S. Dollars
Option 2
Richardson GMP
Canadian Dollar
Account
Richardson GMP
charges you
~0.3 - 1.5%
U.S. Dollar
Bank Account
USD cash,
cheque, bank draft
(only Canadian
domiciled account)
Richardson GMP
U.S. Dollar
Account
End recipient of
the U.S. Dollars
Electronic Fund
Transfer (ETF)
How can we help at Richardson GMP?
Looking at these examples, the extra cost to you as a consumer can range from as low as 0.3% to as high as 3.0%.
Naturally, you would prefer to pay as little as possible so you might conclude that paying with your Richardson GMP
investment accounts would be the best option. However, we recognize that you may not want a U.S. dollar investment
account or you may prefer paying such transactions only through your bank account. If this is the case we can still help
you through our partners at Canadian Forex, a specialized Foreign Exchange Services provider.
Richardson GMP
Canadian Dollar
Account
Canadian
Dollar
U.S. Dollar
Bank Account
(Canadian or U.S.
domiciled account)
U.S. Dollar
Charges you 0.3 - 1.0%
End recipient of
the U.S. Dollars
THE CANADIAN DOLLAR & FOREIGN EXCHANGE
7
By transferring Canadian dollars from your Canadian dollar bank account to Canadian Forex, they have the ability to
convert your Canadian currency to U.S. dollars and transfer them to your U.S. dollar bank account. Depending on the
size of your currency transaction, Canadian Forex will charge approximately 0.3% to 1.0% for their services. Using this
option allows you to save up to 2.7% vs. your Canadian credit card or potentially as much as 1.7% vs. your bank
for the currency conversion. While our discussion today has focused squarely on the Canadian/U.S. dollar foreign
exchange rate, the self-directed platform at Canadian Forex has the flexibility to exchange many different currencies
and wire funds to a number of countries worldwide.
If you would like more information about this option, then we encourage you to reach out to your Richardson GMP
Investment Advisor.
This material is provided for general information only. The comments contained herein are general in nature and are not intended to be, nor should be
construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with
respect to the tax consequences to them, having regard to their own particular circumstances. Before acting on any of the above, please seek individual
financial advice based on your personal circumstances. However, neither the author or Richardson GMP Limited makes any representation or warranty,
expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability
whatsoever for any loss arising from any use or reliance on this report or its contents. Richardson GMP Limited is a member of Canadian Investor
Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used
under license by Richardson GMP Limited. 17008.01.17