Canadians have unique opportunity to benefit from strong U.S. dollar

Canadian investors should benefit from the growing discrepancy between the Canadian dollar and its U.S. counterpart, says Jules Boudreau, senior economist with the Multi-Asset Strategies Team at Mackenzie Investments.

In the latest episode of the Soundbites podcast, Boudreau said the U.S. dollar is likely to continue on its strong path under a Donald Trump presidency — and that’s not necessarily bad news for Canadians.

“The U.S. dollar has appreciated versus the Canadian dollar, and that means that any Canadian investor that has been holding U.S. assets has benefited,” he said. “Canadian investors have benefited a lot from open exposure to the U.S. dollar, and we think they will continue to benefit.”

Bourdreau said fluctuations in the Canadian dollar help our economy absorb the shock of the new U.S. tariffs.

“Floating exchange rates act as lubricants in the global economy,” he said. “Imagine you get hit by a 10% tariff, but your currency depreciates by 5%. You only lost half of your competitivity when you’re selling into the U.S. market.”

He expects further downside in the Canadian dollar, and further upside in the U.S. dollar.

“And that’s a good thing,” he said. “This exposure to the U.S. dollar is a privilege that Canadian investors have.”

Canadians have the option of partly or fully hedging their investment portfolios. They can reduce their exposure to the U.S. dollar as much as they like, but there are reasons to stay invested.

“In general, you always want to keep some exposure to the U.S. dollar because it has this magic property of diversification,” he said.

Its solid performance in recent months makes sense given the multiple tailwinds at its back.

Since the start of the year, the U.S. dollar performed well because the U.S. economy was stronger than other developed economies, allowing the Federal Reserve to maintain higher interest rates than other central banks.

The Bank of Canada’s more aggressive rate cuts revealed a weaker economy and added to downward pressure on the Canadian dollar, resulting in a depreciation against the U.S. dollar of about 5%.

Boudreau said in October, when the odds of a Trump presidency started rising, the U.S. dollar surged, with markets anticipating the impact of his proposed new tariffs, higher deficit spending, reduced regulations — all of which are inflationary in nature and could cause interest rates to stay high.

“Both pre-Trump and post-Trump, we’ve seen a pro-U.S. dollar forces,” he said, and investors embraced the trend.

“A lot of the U.S. dollar’s strong performance due to a Trump presidency has been priced in at this point,” he said. “Markets have reacted very aggressively in realizing that a Trump presidency would mean a stronger dollar.”

Skeptics who suggest the U.S. dollar is overdue for a fall expect the U.S. to lose its hegemony in world markets.

“Right now, it’s the central power in financial markets. If it loses that standing, then its dollar would depreciate,” he acknowledged. “But we don’t think that’s realistic. On the financial market side, the U.S. was, is and will remain the dominant player in the financial markets globally.”

It would take decades to dethrone the U.S., as there is no clear challenger to the title.

“The one challenger is China but its markets are closed and it doesn’t have the property rights that we  enjoy in the U.S. and Canada,” he said. “So, there’s no reason why investors would want to use that as a reserve currency.”

The other theory among U.S. dollar skeptics is that excessive money printing by the U.S. government would cause the currency to debase.

“Deficit spending means higher growth in the short term, and especially higher inflation,” he said. “When we get higher inflation in general, you get higher rates.”  Boudreau said that as long as the Federal Reserve keeps hiking rates, a relatively strong U.S. dollar is likely to persist.

Boudreau said currencies tend to be an underrated factor in most people’s investment portfolios.

“We don’t focus on them. We don’t even realize that we have that exposure. But we need to realize that it is a big driver of portfolio performance,” he said.

It is also a specialized skill to manage currency exposure. The average investor would have difficulty knowing when to hedge or unhedge their investment vehicles.

“That’s why, in general, you want to have access to sophisticated portfolio managers, either macro portfolio managers or allocation portfolio managers that can make that decision for you,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.