For more than a year Canada's loonie has steadily declined from parity with the U.S. dollar to today's range of 88 cents.
For most Canadian investors, given their heavy reliance on domestic securities, it is bad news as their portfolios have declined in value along with the dollar.
The good news for investors is that they can still do something about it, as the Canuck buck is expected to slump further given factors such as declining crude oil prices, the low interest-rate policies of Canada's central bank and a rebounding U.S. economy.
Sophisticated investors and big companies engage in currency hedging all the time to protect themselves against currency fluctuations. Individual investors may want to engage in their own scaled-down currency hedging strategy, but they should be careful: It's a dangerous game.
"Trying to make a bet on currencies is not only very difficult but I think it is very dangerous for most portfolios," said Rajan Bansi, head of fixed income strategies with Royal Bank of Canada Wealth Management division, based in Toronto.
Mr. Bansi said the direction of Canada's currency and what to do about it is one of the questions he is asked the most by RBC's ranks of financial advisers. His advice is to be cautious. "I would not be making short-term big moves to profit or protect against currency."
RBC's forecast is for the loonie to slip to about 86 cents to the U.S. dollar.
He warned that Canada's currency "is very volatile" given that it was at par as recently as February of 2013 and was below 80 cents in 2009. "These moves in the currency are just a reminder to Canadians that it really is a consideration for them when they build their portfolios from a strategic perspective and from a tactical, more short-term basis."
The RBC strategist noted that "hedging is expensive." A cheaper option, he said, would be for a typical investor to increase their exposure to an expected rise in the U.S. greenback by buying more U.S.-dollar-denominated securities. Smart investors would have done that when the dollar was at par, although there is still likely to be a modest upside given it is expected that the loonie should slip a bit further.
Dan Hallett, vice-president and principal of HighView Financial Group of Windsor, Ont., described the process of predicting currency as "humbling." He does recommend that investors engage in simple hedging if they have upcoming U.S. dollar-denominated expenses by investing in safe U.S. dollar investments. But beyond that, investors should spread their currency risk by having "a diversified basket of currencies" by holding a portfolio of international equities.
He is wary of any investment strategy where currency is paramount. "You want to be careful of the currency leading you that way, it should be the other way around."
He recalled that in 2010 he wrote a blog item touting investment in out-of-favour U.S. equities. "If you have an asset that is kind of unloved and beaten up, the currency has probably been similarly beaten up. The good opportunities for investing are usually areas that make people a little bit squeamish at the moment."
For investors unwilling to load up on U.S. equities today given that the loonie has already slid 12 per cent in value over the past year and a half, they may consider passive investing strategies such as buying shares in firms with heavy export exposure or buying Canadian-dollar-dominated exchange traded funds (ETFs) that track U.S. stock indices such as the Vanguard S&P 500 Index ETF. Beyond that, investors can buy some of the growing list of ETFs that offer currency hedging built in.
"If you are going into things like ETFs and you are trying to hedge, the hedging part is not that expensive," said Adrian Mastracci, a Vancouver-based portfolio manager and financial adviser at KCM Wealth Management. "In the long run, you don't need it, you only need it in the long run, but most investors can't wait for the long run."
Mr. Mastracci is wary of advising average investors to play the currency speculation game. In the case of his high-net-worth investors, he did successfully convince many of them to increase their exposure to U.S. equities when the loonie was closer to par, as part of periodic rebalancing.
"We did buy some, and now we are reaping the benefits," he said. "But what we don't do is we don't forecast that the buck is going to go down five or 10 cents. Chances were [the dollar was not going to stay at or above par] but we were happy with the purchases at the currency level that we bought them at."