The Effects of FX
Peter Katevatis - Jan 12, 2015
Much like the gasoline price we all pay (I just filled up for less than $1/litre, woohoo!) we often like to discuss what rate we were able to get exchanging money. It’s like a badge of honour or disgust depending on the rate our financial institutio
Much like the gasoline price we all pay (I just filled up for less than $1/litre, woohoo!) we often like to discuss what rate we were able to get exchanging money. It’s like a badge of honour or disgust depending on the rate our financial institution charges us.
FX is short for Foreign Exchange or Forex. Forex is the worldwide market that handles currency exchange around the world. When we hear quotes about the Canadian Dollar (CAD) it is often the spot rate against the US Dollar (USD). It is usually the rate of one US dollar to Canadian, for example it is $0.8354 today. Occasionally you will hear the Canadian Dollar has fallen to $1.197 which is the quantity of CAD required to buy one USD. These are the same rate, just reciprocals of each other.
Here is a simple video explaining Forex
When you want to convert currency you often see a Buy Rate and a Sell Rate. It can vary from 0.25% to 3% and the difference usually includes the fee for the company to handle your small Forex transaction. I highly recommend using dedicated Forex companies like Vancouver Bullion & Currency Exchange. They will almost always beat the rate at the big 5 banks since this is all they do. Compared to the construction industry, I view these guys as the roofers of the financial industry. Not the highest quality of character, but necessary.
With the recent drop in the price of oil we have also seen a recent drop in the value of the Canadian dollar relative to the US. This is not surprising as the rest of the world views the Loonie as a petro currency. Before the major manufacturers in Ontario start screaming, “Manufacturing is a bigger contributor to Canadian GDP than oil & gas and mining combined!” let me point something out... the rest of the world doesn’t care. We are the only G7 nation that is a net oil exporter and that is how we are viewed.
To no-one’s astonishment, the fall in oil prices has led to a drop in the prices of oil equities. It has also led to a severe drop in oil service companies but also real estate, banks, and retailers in oil producing areas. We have yet to see the effect on corporate earnings, but you can mark Feb 4th, 2015 on your calendar when Suncor releases earnings. It should be interesting.
There are several industries that benefit from falling oil prices (airlines, shipping, and consumers with lower gasoline prices) but I want to focus on the effect of the falling Loonie for investors. If you are holding shares in Microsoft in your RRSP they are trading at the same level (US$46.50) that they were in early September. During that time the CAD has dropped from US$0.919 to US$0.835. Your 1,000 shares have gone from C$50,598.48 to $55,688.62 just by virtue of the exchange rate. A 10% return in 4 months with no price movement!
Investors know that shares face the same risk if the Canadian dollar rises, but how can we take FX out of the equation? Canaccord Genuity Wealth Management has JUST introduced registered accounts (RRSP, RRIF, TFSA) in US Funds. There are a couple detailed rules but I am proud of Canaccord for taking a leading role in offering a product that benefits investors.
If you are interested in a US Funds registered account, feel free to contact me.