Currency Effects on Canadian Investors

The financial world centres on the US dollar. This is of particular importance for those of us who invest in Canadian companies that operate in a global market. Here are some common examples of non-diversified investment vehicles that are impacted:

• Commodities and commodities-based stocks: This includes raw commodities (futures, other derivatives, ETFs) such as silver, zinc and potash, and a whole host of Canadian companies, including Pan American Silver, Lundin Mining, Agrium and Petro Canada.
• Stocks trading on both Canadian and US exchanges: Many companies list on multiple exchanges world-wide to access investors in financial centres where they have a substantial business or investor interest. These range from primarily Canada-focused businesses like Telus and Suncor to multi-nationals like Nortel and Canadian Pacific. There are also companies that started in Canada that list only in the US (Entrust) to those that have found the more onerous listing requirements in the US burdensome (Zarlink).
• Canadian companies reporting in USD: Just as English is increasingly the global language of business, the USD is the currency of choice for companies that operate globally, or aspire to do so. This can be a bit confusing since, while the companies key financial metrics (P/E, revenue, debt, etc.) are priced in USD, the basis of the exchange used for reporting can be obscure without some digging and it typically does not reflect the exchange rate when you buy and sell shares.
• Canadian companies primarily reliant on exports to the US or products priced in USD: This is not only true of all commodities companies but also heavy exporters like Bombardier and Magna. A stronger CAD:USD rate reduces CAD-reported revenue and earnings when the prices of products is maintained in USD.

Small moves in the CAD versus the USD not only matter, they can add up substantially over time. Let’s look at one company, Canadian Natural Resources, which trades on both the TSE and NYSE, reports in USD, and is largely priced on the basis of their primary product, crude oil, which is a commodity priced in USD.

Notice how the price of the two stocks diverge based on the CAD:USD rate. The CAD:USD exchange rate has moved wildly over the previous two years, impacting the prices of the company’s stock on the TSE and NYSE. It is true that the value of a share invested on either exchange remains about the same when measured in one currency (less currency conversion losses in both directions), yet even if you ignore the NYSE entirely the value of your CNQ share varies with CAD:USD.

If you hold an investment for any length of time you need to consider the effect of a trending exchange rate. Even if you're a day trader, the daily volatility in the exchange rate can effect returns; the share price of a dual-listed stock may go in opposite directions on the two exchanges on days when the CAD:USD rate moves significantly.

And, last, if you bought USD$1.00 when the CAD:USD rate was 0.66, that dollar bill has lost 1/3 of its value in CAD. The same goes for a share in a US stock that has the same USD quoted price then and now.