How to Stretch Your Loonie Ex­pert Tips

When the loonie meets the ea­gle: how to get more bang for your buck

ZOOMER Magazine - - CONTENTS - By Gor­don Pape

IGET SEV­ERAL E-MAILS each week from snow­birds ask­ing when is the best time to buy U.S. dol­lars.

I wish there were an easy an­swer, but there isn’t. How­ever, I can of­fer a few tips that may help you get the best ex­change rate.

First, let’s look at some re­cent his­tory. Ac­cord­ing to the Bank of Canada web­site, the Cana­dian dol­lar opened 2017 at US$0.7443. That meant it took $1.3435 of our dol­lars to buy one U.S. green­back.

The con­sen­sus prog­no­sis at the time was that the loonie would head lower, pos­si­bly to the US$0.70 range. The ra­tio­nale was a com­bi­na­tion of low oil prices and the ex­pec­ta­tion that the U.S. Fed­eral Re­serve Board would be­gin to raise its key rate while the Bank of Canada held the line.

Those predictions may have prompted a lot of peo­ple to con­vert loonies be­fore the value sank even more. In hind­sight, that would have been an ex­pen­sive move – and it shows how lit­tle faith you can place in cur­rency prog­nos­ti­ca­tions, even from top econ­o­mists.

The sharp de­cline didn’t hap­pen. In­stead, the loonie grad­u­ally strength­ened over the win­ter. It only started to pull back in the spring, drop­ping to US$0.7276 on May 4. At that point, the pes­simists were even more in­sis­tent that a drop to US$0.70 wasn’t far off.

In­stead, the cur­rency sta­bi­lized and then be­gan to gain up­ward trac­tion in May. Com­ments from Bank of Canada of­fi­cials sug­gest­ing the econ­omy was per­form­ing bet­ter than ex­pected drove it even higher.

On July 12, our cen­tral bank raised its overnight rate by a quar­ter point to 0.75 per cent and the loonie jumped three-quar­ters of a cent. In mak­ing the an­nounce­ment, gover­nor of the Bank of Canada Stephen Poloz ex­pressed a pos­i­tive eco­nomic out­look, cit­ing ev­i­dence of strong- er than ex­pected growth that boosted “con­fi­dence in the out­look for the econ­omy and in­fla­tion.” That raised spec­u­la­tion about more hikes – the Bank in­creased the rate by a quar­ter point in Septem­ber which, as typ­i­cally hap­pens, pushed up the value of our cur­rency.

The loonie kept mov­ing up af­ter the rate an­nounce­ments, hit­ting a high of US$0.8245 on Septem­ber 11. At that point, the cost of a U.S. dol­lar was down to $1.2128. As I write, the rate is US$0.8103, or $1.2341 to buy a U.S. buck.

These are a lot of num­bers to digest, so let’s nar­row it down to the ba­sics. At its low­est point this year, our dol­lar was worth US$0.7276. At its high­est point, it was val­ued at US$0.8245. That’s a dif­fer­ence of 13.3 per cent in a rel­a­tively short time frame. Put an­other way: if you had bought $10,000 U.S. dol­lars when the loonie was at its low­est, it would have cost you CDN$13,743,

in­clud­ing the bank ex­change rate. If you had made the same pur­chase when it was at its high­est, your cost would have been CDN $12,128. That’s a sav­ing of CDN $1,615.

So what can we learn from all this in terms of when to buy U.S. dol­lars? For starters, don’t put too much stock in predictions. As we have seen this year, even the ex­perts have trou­ble fore­cast­ing for­eign ex­change move­ments. Se­condly, keep in mind that cur­rency move­ments can be volatile. Changes in in­ter­est rate ex­pec­ta­tions, the price of oil, eco­nomic fore­casts and po­lit­i­cal de­vel­op­ments can move the rates sig­nif­i­cantly within a few days.

Here’s how I ap­proach the prob­lem. I have set up two ac­counts at my bank, one in Cana­dian dol­lars and the other in U.S. cur­rency. I have also ar­ranged to do an im­me­di­ate on­line trans­fer from one ac­count to the other at any time. I use CIBC for this but I’m sure any other ma­jor bank can do the same.

I then mon­i­tor U.S. dol­lar ex- change rates on a daily ba­sis. I never try to guess the highs or the lows; rather, I wait un­til the rate looks right for the cur­rent cir­cum­stances and then con­vert some – but not all – of my money. For ex­am­ple, I changed CDN$7,000 into U.S. funds on the day af­ter the July Bank of Canada rate an­nounce­ment. I didn’t hit the high for the year, which came in Septem­ber, but I was con­tent with the rate I re­ceived.

If you don’t have on­line ac­cess to your ac­counts (and I un­der­stand some peo­ple are mis­trust­ful of be­ing hacked), then this would in­volve a trip to your lo­cal branch when you want to con­vert. Just be sure you have the two ac­counts al­ready in place first.

One more tip: I re­ceived a no­tice from my bro­ker the other day, sug­gest­ing that I keep money on de­posit with her, and they would con­vert it to U.S. cur­rency at a bet­ter rate than the banks charge. I have not had time to fol­low up on how much of a sav­ing that might be and whether it would be worth the has­sle. But if you use a full-ser­vice bro­ker, it may be worth a call.

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