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As a Canadian living in a border town, discussion surrounding the conversion between CAD and USD is particularly pronounced. A huge number of people in my area go South of the Border to do their groceries where certain products such as dairy are significantly cheaper.

This phenomenon has been put under pressure as of late as a result of a weakening Loonie versus the Almighty American Dollar. With oil’s decline, the value of the CAD has been steadily pulling back as Canada has a huge stake in the oil market. The oil sands in the Western provinces are one of the financial hallmarks of the country itself.

Prediction Errors

Trying to forecast foreign exchange any length into the future is nothing but pure speculation. I remember just a few short years ago* when the Canadian dollar was actually worth more than our neighbours to the South. At that time, commentators were clamoring about how high the CAD might eventually rise.

As with any asset class, people seem to think what goes up will go up in perpetuity and what goes down is ultimately doomed. Most lack the perspective necessary to capitalize on opportunities.

While I am certainly no Nostradamus, I did have the foresight to transfer a few thousand dollars into USD for investment purposes when CAD stood above par. At the time I remember friends and some family seriously questioning my decision since, “Everyone says the CAD is going higher!” Nevertheless, I reasoned that the trend would eventually reverse and the USD would come to overtake us once again. In any event, I figured, getting USD at slightly above par was a solid decision given my overall long-term goals.

My Goal and How I’m Playing FX

My eventual goal, being so close to the U.S. and frequently traveling there, is to eventually have a few thousand dollars annually rolling in passively through dividend income. This would be money I receive in USD directly from American companies so that I no longer need to concern myself with foreign exchange woes.

One of the advantages I have begun to truly realize and take advantage of is the fact that freelance work that I do online tends to come in USD. As a result, if I need more American capital to go on a vacation or to fund my U.S. investment account, I can simply put in a little extra work and be paid directly in the currency I desire.

Having multiple streams of income is great, isn’t it?

Just a Note on Currency Manipulation…

If you follow the financial media, you are sure to have heard accusations that China has been manipulating its currency. Politicians eager for some airtime are quick to point out how the big competitor to the East has been using financial chicanery to lower its currency value and thus encourage exports to other nations.

It should be made clear that more or less all developed nations manipulate their currencies. Interest rate moves and the printing of currency, among other tactics, all influence currency values on some level. The Federal Reserve in the U.S. has embarked on several incredibly aggressive rounds of quantitative easing (money printing) to prop up the financial system over the past few years through the crisis. Canada has recently been seen as the next nation to consider such a move.

Regardless, as a small retail investor, I do not take too much of this with anything more than a healthy grain of salt. My ultimate goal is to acquire more high quality assets over time whether currency is rapidly printed or interest rates go up/down/sideways/whatever. Central bankers can’t impact my level of resolve and have zero impact on how much I determine to invest.

Conclusion

Foreign exchange is predictably volatile; guessing which way it will go is all but useless, but that doesn’t mean you can’t come out on top.

My rule of thumb is to change CAD into USD any time the exchange is near par. I’m willing to bet the United States will still be around doing big business for decades to come. Living in a border town makes it all the more important for me to hedge my currency holdings.

Thank you for reading.

Ryan

How are you handling the presently strong U.S. Dollar?

* You can check out the Bank of Canada’s CAD/USD Exchange Rate Lookup tool here.

Pictures courtesy of pixabay.com

2 thoughts on “Foreign Exchange

  1. Hey!!
    The post is quite informative.
    After reading this I can say that foreign exchange is the exchange activity takes place between currencies and provides liquidity and accessibility to the traders availing the service provided.
    The foreign exchange market or forex simply refers to making big money. This market is concerned with trading one type of currency for the other. You spend one type of currency to buy another.
    You exchange once foreign currency for the other. You won’t have any commission based buying or selling.

    Thank you so much for this share.
    Keep doing good work.
    God Bless U!!

    1. Hi Michael,

      Thank you for your comment and kind words. FX is something I’m accustomed to based on my proximity to the U.S. border, but it isn’t something I “trade” in. Rather, I like to be hedged between CAD and USD and plan to stay that way over the long term.

      Take care!
      – Ryan

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