Loonie’s rise can have negative consequences for those with foreign mutual funds

For Canadians with foreign mutual fund investments, a rising loonie can have negative consequences — unless you stay the course.

Over the past year, the Canadian dollar — the loonie — is doing well relative to the U.S. dollar and many other major global currencies.

But for Canadians with foreign mutual fund investments, a rising loonie can have negative consequences — unless you ignore the current currency volatility and stay the course for the long term. Here’s why.

Historically, the Canadian dollar has had many ups and downs against its U.S. counterpart. In 2002, the loonie hit a low of 61.79 cents, followed by a climb to parity and beyond.

Oil is a major reason why the loonie has appreciated. Historically, the Canadian dollar is highly correlated with the price of oil. Canada is a significant oil supplier, and as demand (and crude prices) increase, the demand for Canadian dollars increases as more must be purchased to pay for this commodity.

For Canadian dollar investors with international investments, the ascent of the loonie has meant a portion of returns generated by global indexes have not been fully realized. Even though Canadian investors buy units in foreign investments with Canadian dollars, those dollars must be converted into foreign currencies so the fund manager can buy foreign securities.

When the Canadian dollar appreciates, the foreign currency will be worth fewer Canadian dollars  causing a negative effect on that Canadian investor’s foreign assets. When the Loonie depreciates, the foreign currency is able to buy back more Canadian dollars than originally invested – causing a positive effect on the value of the foreign fund.

Forecasting geopolitical events and currency movements is a mug’s game — even the experts won’t try. Like market volatility, currency volatility tends to smooth out over time so the best strategy is to continue investing according to your personal time horizon and tolerance for risk. Your professional advisor can help you determine a beneficial strategy for your situation.

J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.

 

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