Significant USD/CAD movements. CAD weakens as USD strengthens - lesson on currency exchange

Yesterday, Fed Chair Powell came out and threaten to increase interest rate due to strong economical data.

This spook the market significantly as some trades are now betting on a 50 basis point interest rate hike.

On the other hand, Bank of Canada said they have done enough and looking to pause + hold rates for now.

When you are looking at the exchange rate between two countries, the interest rate is the key factor that determines whether the exchange rate is going up or down.

We see that CAD is currently dropping as the Bank of Canada is planning to hold the interest rate while US is looking to increase the interest rate.

A lesson in Forex:

To put simply, countries with high-interest rate will attract capital and lead to a stronger currency as investors fled to the country with more return

How does that impact your portfolio:

If your portfolio is in USD, then you're fine. You will continue to enjoy the high interest rate offered by US for now.
If your portfolio is in CAD, that's fine as long as your expenditure is in CAD. However, shopping internationally will be worse off for you (especially in US)
If your portfolio is in USD and you live in Canada, then that's great - you will enjoy an increase in value of your portfolio even if you just hold cash (and not investing). If you are investing, then of course - you will benefit from the higher return in US as well (as it attracts more investors)

What we did in Investing Accelerator:

For the last year till now, we have been focusing our portfolio exclusively in US stocks. I told my students to convert into USD and hold onto them
Even if the students in Canada didn't invest or just holding cash - waiting for an opportunity, at least they locked in a good rate for USD and can easily convert back to Canada anytime.

That's a lesson on FX for you. What do you think?

Cheers,

Eric, CPA, CIM

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