Portfolio Construction - The good and bad of currency fluctuations

September 29, 2017 • Portfolio Construction

By Alfred Lam, CFA
Senior Vice-President and Chief Investment Officer, Multi-Asset Management

Planning a vacation in the United States any time soon? I have good news – it will cost you approximately 9% less compared to just four months ago as the U.S. dollar has depreciated 9% against the Canadian dollar.

There have been several unexpected events that may explain the sudden re-pricing of the loonie. First, Bank of Canada Governor Stephen Poloz raised interest rates twice this year: by 25 basis points in July and 25 basis points in September. The increase was unexpected by markets as the economic backdrop had not really changed: oil prices remained low, Canadian economic growth was relatively weak compared to previous recoveries and inflation was well below the central bank’s target. The increase in rates narrowed the interest rate differential between Canada and the U.S. to 25 basis points from 75 and is expected to attract capital to flow to Canada. Second, U.S. growth prospects have weakened over the last few months. U.S. President Donald Trump was not able to introduce a replacement for Obamacare and there were no tax cuts or stimulus plans on the table. Third, it is expected that hurricanes Harvey and Irma will have at least a temporary impact on the economic growth of the regions affected, especially in the oil sector. Lastly, tensions with North Korea are creating uncertainties.

For those with investments in the United States, the recent depreciation of the U.S. dollar may have had an adverse effect on the values of their portfolios. For example, the S&P 500 Index, which measures the performance of the broad U.S. stock market, gained 4.5% in the last four months ending August 31. However, when the return is converted to Canadian dollars (after accounting for the depreciation of the U.S. dollar), it becomes a loss of 4.2%.

As part of our currency management program, we hedge currency fluctuations using derivatives. As a result, the impact of the U.S. dollar’s recent decline on our portfolios has generally been less than if we did not hedge. We hedged approximately 50% of our U.S. dollar exposure in May, meaning that for every dollar of exposure to U.S. securities, we only had 50 cents of exposure to the U.S. dollar. We generally use a mean-reversion currency management model, which means we decrease U.S. dollar exposure when the dollar is expensive and increase exposure when it is cheap, based on both historical prices and economic fundamentals.

It is difficult to predict central bank policies and currency values. We expect rising interest rates and the stronger Canadian dollar to taper economic growth and inflation, which will in turn cause rates to rise at a more moderate pace. Following the U.S. dollar’s fall, we have increased our U.S. dollar exposure. This will provide additional upside should the dollar revert back to the mean. We will continue to adjust our U.S. dollar exposure as the market value deviates further from its fundamental value.





This document is intended solely for information purposes. It is not a sales prospectus, nor should it be construed as an offer or an invitation to take part in an offer. This report may contain forward-looking statements about one or more funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. United pools are managed by CI Investments Inc. Assante Wealth Management is a subsidiary of CI Investments Inc. Neither CI Investments Inc. nor its affiliates or their respective officers, directors, employees or advisors are responsible in any way for damages or losses of any kind whatsoever in respect of the use of this report. Commissions, trailing commissions, management fees and expenses may all be associated with investments in mutual funds and the use of the Asset Management Service. Any performance data shown assumes reinvestment of all distributions or dividends and does not take into account sales, redemption or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund prospectus and consult your advisor before investing. Assante Wealth Management and the Assante Wealth Management design are trademarks of CI Investments Inc. This report may not be reproduced, in whole or in part, in any manner whatsoever, without prior written permission of Assante Wealth Management. Copyright © 2017 Assante Wealth Management (Canada) Ltd. All rights reserved.

« back to Newsletter page