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Does currency fluctuation affect how you invest?
Old 01-22-2014, 03:37 PM   #1
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Does currency fluctuation affect how you invest?

With the Canadian currency tanking almost 10% in the last year, I find myself (a Canadian) a little shy on purchasing US and International equities at the moment. However, I would really like to increase my US/international asset allocation as my current AA is already overweight Canadian.

So my question is: Should currency fluctuation affect how one invest's? Should I continue to invest unhedged to my desired AA??
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Old 01-22-2014, 04:34 PM   #2
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So my question is: Should currency fluctuation affect how one invest's? Should I continue to invest unhedged to my desired AA??
My uninformed opinion is yes and yes.
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Old 01-22-2014, 05:00 PM   #3
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asked another way: as an american, would the current rise of the USD sway you into increasing your international equities?
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Old 01-22-2014, 05:08 PM   #4
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asked another way: as an american, would the current rise of the USD sway you into increasing your international equities?
Only if I could backtest the strategy for 20 years and see how it worked out. To answer more directly, if the US equities had positive momentum (currency + equity performance) I'd go with them. If not then international. I actually do this sort of thing but it's based on an algorithm and it doesn't work out every month -- just over the longer term hopefully.
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Old 01-22-2014, 07:43 PM   #5
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As a fellow Canadian - not really. Now if it was a bigger spread than it is now (and I thought it would go down before I sold the stock), perhaps. On the positive side, quite a few of the stocks I hold pay out their dividends in USD. I also have the option with my brokerage of investing in a company in USD or in CAD - do you have that option?

I tend to shy away from spending too much in USD, but when we were at par a few months ago, I funded a portion of the 2014 travel fund in my US account so I won't feel as much pain when/if we venture south. Things I tend to buy or do are still so much cheaper though so it's still a good deal.
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Old 01-22-2014, 08:17 PM   #6
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I also have the option with my brokerage of investing in a company in USD or in CAD - do you have that option?
Yes, I do but I am already fully invested with my US dollar account. Being in accumulation phase, I can purchase international equities in either USD (after currency conversion) iusing cdn dollars.........but I believe the net effect is the same ie. there is an ~10% cost premium compared to 1 year ago.

On the bright side, I calculate NW in cdn dollars and since half of my portfolio is USD......it has juiced my investment returns as of late.
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Old 01-22-2014, 09:02 PM   #7
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On the bright side, I calculate NW in cdn dollars and since half of my portfolio is USD......it has juiced my investment returns as of late.
If the CAD ever went back to the 60 cents or so american it was worth, I'd be sitting very pretty.
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Old 01-22-2014, 09:14 PM   #8
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Not a great time to revise your AA toward U.S. equities. Normally, you might be selling them to rebalance.

You could go half way now, or up to your rebalance buy trigger point if that is less. Then see what happens or rebalance again if necessary.
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Old 01-23-2014, 05:30 AM   #9
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asked another way: as an american, would the current rise of the USD sway you into increasing your international equities?
This is a different question. You said you were underweight US and int'l equities. If that is so, you should get back up to target weight.

The second question is exchange rate. You are looking at the decline in the loonie over one year and asking how that should affect your choice. Why not look at two years, or five? There is no "right number" for exchange rates, it is what it is, and it is very difficult to forecast. Your unhedged investment in non-US int'l diversifies against both currencies.
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Old 01-23-2014, 07:40 AM   #10
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Only the fact I have some Cashish in CIBC in Canada and it's value against the USD has tanked 10% as another poster says. It is locked up in a 36 month GIC (Canadian Version of a CD). So other than the bottom line net worth, I do not notice it.

If it drops back to 1.6 as it used to be in the 90's I will cash in and move to Vancouver Island. But that is a long way to go. However, the Canadian Government manages their financial house well. As we all know here in the US they would rather play in a sandbox than do anything constructive so I do not see any radical changes ahead.
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Old 01-23-2014, 08:12 AM   #11
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This is a different question. You said you were underweight US and int'l equities. If that is so, you should get back up to target weight.

The second question is exchange rate. You are looking at the decline in the loonie over one year and asking how that should affect your choice. Why not look at two years, or five? There is no "right number" for exchange rates, it is what it is, and it is very difficult to forecast. Your unhedged investment in non-US int'l diversifies against both currencies.
Thanks MichaelB for this explanation.

So if I understand this correctly, the history of a currency (wether USD or loonie) is “water under the bridge” and should not influence future investment allocations (one’s target AA takes precedence) and also that I should assume that a given currency has an equal chance of appreciating/depreciating in the future.
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Old 01-23-2014, 08:15 AM   #12
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This is a different question. You said you were underweight US and int'l equities. If that is so, you should get back up to target weight.

The second question is exchange rate. You are looking at the decline in the loonie over one year and asking how that should affect your choice. Why not look at two years, or five? There is no "right number" for exchange rates, it is what it is, and it is very difficult to forecast. Your unhedged investment in non-US int'l diversifies against both currencies.
Thanks MichaelB for this explanation. This makes sense. I should assume that a given currency has a 50/50l chance of appreciating/depreciating in the future.
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Old 01-23-2014, 04:40 PM   #13
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Our philosophy calls for our FI port to have as little volatility as possible thus we try to keep FI in high quality short to medium term instruments denominated in USD.

For equities we want volatility. So 40% in USD and 60% in non-USD.
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Old 02-12-2014, 01:36 AM   #14
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Originally Posted by Apex1 View Post
With the Canadian currency tanking almost 10% in the last year, I find myself (a Canadian) a little shy on purchasing US and International equities at the moment. However, I would really like to increase my US/international asset allocation as my current AA is already overweight Canadian.

So my question is: Should currency fluctuation affect how one invest's? Should I continue to invest unhedged to my desired AA??
I don't understand. If Canadian currency compared to the USD decreased 10% in the last year, wouldn't that make you more likely to purchase US and international equities?

Is it true that the historical exchange rate has no relationship with the future exchange rate? I can't think of a reason that it wouldn't be the case, but if it is true then there should be no consideration of currencies in investing, which puts foreign and domestic investment options on equal footing. However, some currencies have had substantial declines in the past few decades. Maybe investing in equities would balance some of the currency loss, but it seems hard to imagine not considering currency fluctuation.
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Old 02-12-2014, 05:17 AM   #15
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Yes. I have a large account in Europe, therefore Euro vs $ rate impacts the way I invest.

I expect the $ to crash in the next 10 to 20 years because of all the money printing going on here.

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Originally Posted by Apex1 View Post
With the Canadian currency tanking almost 10% in the last year, I find myself (a Canadian) a little shy on purchasing US and International equities at the moment. However, I would really like to increase my US/international asset allocation as my current AA is already overweight Canadian.

So my question is: Should currency fluctuation affect how one invest's? Should I continue to invest unhedged to my desired AA??
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Old 02-12-2014, 11:33 AM   #16
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But if everyone already knows about the money printing going on here, isn't this already reflected in the exchange rate? Wouldn't it be like the efficient market hypothesis?
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Old 02-12-2014, 11:46 AM   #17
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Quote:
Originally Posted by Apex1 View Post
With the Canadian currency tanking almost 10% in the last year, I find myself (a Canadian) a little shy on purchasing US and International equities at the moment. However, I would really like to increase my US/international asset allocation as my current AA is already overweight Canadian.

So my question is: Should currency fluctuation affect how one invest's? Should I continue to invest unhedged to my desired AA??
I do not directly use currency fluctuations in my AA. What I do is to take the international equity allocation and move it between the home country (USA) and international based on an algorithm I researched that has statistically worked nicely over decades. But this partly depends on having the asset space available in one's untaxed accounts.

The goal is to do better then either international or US although it has in recent years performed between the international and US. Still it has outperformed a strict buy-hold international component.
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Old 02-12-2014, 01:02 PM   #18
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The exchange rate fluctuations do not affect how I invest either within the USA or abroad. Even though I do have money in the UK it is all interest bearing since investing in passive equity and bond index funds is a whole other level of taxation complexity with the PFIC rules.
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Old 02-12-2014, 02:35 PM   #19
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Nobody knows where exchange rates are going next. Billions trade on the markets every few seconds. I read that something like $4 trillion trades every day. My only hope is to profit from large multi-year directional changes. But those are never going to be known except in retrospect.

Here is a long term picture of the US dollar versus the Canadian. I generally am more familiar with the US trade weighted dollar which looks a lot different. Interesting and I wouldn't know how to explain it but maybe our Canadian friends can:

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Old 02-12-2014, 03:08 PM   #20
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Currency fluctuation does impact where I plan my next vacation.
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