A Closer Look At the Canadian Dollar’s Decline

Much has been said about the loonie’s recent slump, after it fell below 68 U.S. cents in February, to a level not seen in 20 years. A mix of factors is at play: diverging monetary policies between the U.S. and Canada, with lower interest rates making the loonie less attractive to foreign investors; ongoing U.S. tariff threats; and a strong U.S. dollar.

Historically, the Canadian dollar (CAD) has moved through cycles (chart, top). From 2005 to 2014, the CAD traded at highs due to strong resource demand, surpassing parity with the U.S. dollar (USD) in 2007 and peaking at US$1.06 in 2011. However, over the past 50 years, the loonie has averaged around US$0.80.

A weaker CAD increases the cost of imports and reduces purchasing power, making travel to the U.S. more expensive. This has taken a toll on many snowbirds, who are increasingly selling their U.S. homes. Reports from Florida indicate the number of Canadian sellers has risen in recent years due to higher costs exacerbated by a weak loonie.

For investors, currency swings impact returns on foreign-denominated investments when converted to CAD. A notable example of currency risk occurred between 2000 and 2009—a period with parallels to today. To start the millennium, U.S. equity markets were at record highs amid the dot-com boom, while the CAD traded below 70 U.S. cents. An investor who put CAD into the S&P 500 Index in early 2000 would have experienced losses—not only from the index decline but also from CAD appreciation. Between January 2000 and December 2009, the S&P 500 declined by 24 percent, while the CAD appreciated by 38 percent, leading to a loss in CAD of 45 percent.

As advisors, one of our roles is to assess how currency movements impact investments. Over the long term, currency fluctuations tend to balance out in well-diversified portfolios, as gains in one currency can offset losses in another. Financial theory suggests that exchange rates adjust over time to equalize purchasing power across currencies and, in efficient markets, exchange rate fluctuations are typically reflected in asset prices. There are ways to mitigate currency risk directly, such as by using currency-hedged investment funds, which can minimize the impact of currency fluctuations, or Canadian Depository Receipts (CDRs), which allow investors to buy foreign stocks on Canadian exchanges in CAD to reduce exchange rate exposure. Of course, these depend on an investor’s strategy and objectives.

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