Advisor: time to hedge international investments

While the loonie has come up shorter and shorter against the greenback, new information suggests the bleeding could soon come to an end

A Reuters’ poll came out last week that suggests most foreign exchange experts believe the U.S. dollar at C$1.30 has pretty much run its course and any further declines, while certainly not out of the realm of possibility, are increasingly unlikely.

As a result the idea of hedging versus not hedging is very much on the minds of most advisors and their clients.

“How low can the Canadian dollar go? It can go back into the low 60s range. That would still add to returns for unhedged currency-type international funds,” said Assante Financial  Management Ltd. advisor Glenn Szlagowski. “But what if the Canadian dollar actually goes up in value someday? I really believe that wild fluctuations in the currency markets, especially in the extreme, eventually self-correct.”

The Kitchener-Waterloo advisor is very much a believer in hedging international investments at this point, preferring to avoid timing markets, whether we’re talking about currencies, interest rates or individual stocks, ETFs or mutual funds.

Some of the foreign exchange experts polled for Reuters’ survey do see some value in continuing to bet against the Canadian dollar given the loonie’s recovery is likely to take much longer than the Bank of Canada is expecting due to falling oil prices.

"It's the second-round effect of weaker oil prices which is only just becoming apparent and the growing evidence that the rebound in the activity the Bank of Canada had expected is going to take a lot longer to come through," said Adam Cole, global head of FX strategy at RBC Capital Markets. “The risk of further rate cuts continues to overhang the market, and with commodity prices making new lows, that dynamic is still negative."

Despite being inclined to hedge at this point, Szlagowski reminds readers of the old joke, “The trend will continue until it ends.”

True enough.