Personal Investor: Protect your portfolio from Trump currency swings
If Donald Trump’s first 100 days as President of the United States is any indication of the next few years, it’s time to buckle up your investment portfolio.
His brash and incoherent style has proven to move markets – mostly notably currency markets. His trash-talk on trade with Canada has helped sink the Canadian dollar by more than two cents in as many weeks. If the U.S. dollar becomes too strong, a few well-timed tweets could bring it back down and lift the loonie. He’s done it before.
It brings an added layer of risk to Canadian investors who must go beyond our borders to diversify their portfolios. Alfonso Esparza, senior currency strategist at OANDA says he expects the loonie to fall further – some calls go to as low as 60 cents to the U.S. dollar. The truth is no one really knows, and that’s why he says investors need to be more active when it comes to hedging currencies.
A weak Canadian dollar is a good thing if many of your holdings are already in U.S. dollar denominations. It’s bad if you’re trying to invest in U.S. dollar securities because it doesn’t buy as much when it’s converted.
Trying to determine if the loonie will go up or down from its present level is a mystery many investors would like to eliminate from their portfolios – and that’s when a currency hedging strategy comes in handy. Sometimes that strategy means not hedging at all.
There are a lot of moving parts to hedging currencies, and help from a qualified financial advisor is recommended.
Here are a few currency-hedging considerations for Canadians:
Many foreign exchange traded and mutual funds have currency hedged versions. They have the same holdings but fees on the hedged version are normally higher.
Resource stocks – even Canadian resource stocks – have built-in currency hedges because they sell the commodities they produce on the global market in U.S. dollars. If the Canadian dollar falls in value, revenue will be boosted when converted to Canadian dollars and that could find its way into your pocket through dividends or capital appreciation.
U.S. dollar accounts are permitted in registered retirement savings plans (RRSP) and tax free savings accounts (TFSA). A parallel U.S. portfolio provides unlimited options to try to capitalize on currency fluctuations or segregate trading to lower risk.
It can also come in handy for snowbirds who want to travel or retire in the U.S. and want a pool of U.S. dollars that won’t change in value whenever Trump tweets.