Yes I trade with IB as well so I know their f/x rates are way better than what the banks can offer. The issue is that for a Canadian who is trading mostly US stocks, I’m holding a lot of USD, which is a risk as the USDCAD continues to weaken. I don’t want to convert back to CAD if I feel this USDCAD weakness continues because I will still be trading mostly US stocks. So the best answer is to hedge, but I’m trying to figure out the best way to hedge.
USD vs CAD for Canadians
- Thread starter ValeryN
- Start date
Yes I trade with IB as well so I know their f/x rates are way better than what the banks can offer. The issue is that for a Canadian who is trading mostly US stocks, I’m holding a lot of USD, which is a risk as the USDCAD continues to weaken. I don’t want to convert back to CAD if I feel this USDCAD weakness continues because I will still be trading mostly US stocks. So the best answer is to hedge, but I’m trying to figure out the best way to hedge.
I don’t have much experience trading currency futures, so can you quantify how illiquid or expensive currency futures are? I’m pretty familiar with equity options, which is why I looked into the USX USDCAD currency options that is available on IB.
The other way to hedge I thought about is to just buy FXC, which is a CADUSD ETF. It’ll eat up margin and buying power, but I don’t tend to use much leverage anyways. They have options on FXC as well, so I could also buy calls on FXC and that’ll use up less capital.
It sounds like you are looking for long term advantage. Personally I have been in and out of CAD from a USD base for property transactions in CA. IB is a good way to do the exchange. (wires are a little tricky though). CME CAD/USD futures or options variants are a good way to hedge. They have a micro too now.
Besides when I need it, I will hold or accumulate excessive amounts when there is a very clear advantage. If I need it, and it is unfavorable, I hedge it with CME futures.
E.g. when it was way low (90s), I bought 150% of what I needed to buy property. Sold the property when CAD-USD hit parity+, repatriated all to USD. Bought CA property 4 years ago, it appreciated and sold, holding now 5 months and will continue selling as it gets lower or until I need it.
In other words, cash is cash, CAD or USD, so I deploy it (invest) and use the exchange rate as a "kicker" to the investment. For the casual person (non trader), this works out best, imo, and allows you to concentrate on deploying the cash. I made far more in the investments than the exchange rate.
As far as the drivers, others are better at advising.
I’m in Canada but have 100% of the portfolio in USD.
Most research I’m reading indicates that stimulus and low rates are the principal drivers for the next 1-2 years of USD decline versus EM currencies. Since CAD is tied to commodities much like EM currencies, I think it makes sense.
I’m not so sure that it’s wise to hedge into CAD. Maybe the safer play is to hedge into 2-3 other currencies including CAD?
Also, there is a timing issue. CAD just appreciated quite allot and any hedge today will unwind an “inherent” hedge built into the USD (which is that USD is inversely related equity returns).
So all this to say...I may not hedge at all because I see the CAD hedge as actually an increase in equity risk (ie, we have to have a bull market scenario for CAD to appreciate, so equities already making money). The way I see the CAD hedge is that we make more money if we are already making money but losing more if market declines.
Anyone agree/disagree? I just don’t see it as a real hedge for a Canadian domiciled US equity investor.
Most research I’m reading indicates that stimulus and low rates are the principal drivers for the next 1-2 years of USD decline versus EM currencies. Since CAD is tied to commodities much like EM currencies, I think it makes sense.
I’m not so sure that it’s wise to hedge into CAD. Maybe the safer play is to hedge into 2-3 other currencies including CAD?
Also, there is a timing issue. CAD just appreciated quite allot and any hedge today will unwind an “inherent” hedge built into the USD (which is that USD is inversely related equity returns).
So all this to say...I may not hedge at all because I see the CAD hedge as actually an increase in equity risk (ie, we have to have a bull market scenario for CAD to appreciate, so equities already making money). The way I see the CAD hedge is that we make more money if we are already making money but losing more if market declines.
Anyone agree/disagree? I just don’t see it as a real hedge for a Canadian domiciled US equity investor.
I'm Canadian but 99% of my trading is in the US. So virtually all my funds are in US dollars but I hedge a portion by buying CAD futures. So, I'm consistently in the 50/50 range.
Why? (Just as a hedge)
It is kind of funny how the CAD$ moves with the equity market. A $400 billion deficit and the CAD continues to inch up....
Why? (Just as a hedge)
It is kind of funny how the CAD$ moves with the equity market. A $400 billion deficit and the CAD continues to inch up....
I'm similar to your situation that you've described except I haven't traded CAD futures before. Can you elaborate what futures exchange you use and how far out you go out? What are commissions and slippage like? Sorry for the noob questions, but I want to hedge and it'd be great to get some tips on how to get started with currency futures. Thanks!
Just like in the 2009 recovery, Cdn$/US$ is in a strong trend up. I was invested heavily in US assets in recent years but since Covid I'm in Canadian dollar assets because I expected Cdn$ to get stronger like in 2009 forward. Cdn$ peaked at $1.06 US then slowly dropped back to the same 69 cent area it was before. 78-82 cents seems natural in the near future with the possibility of 90 cents as a landing spot in some scenarios. Of course there is a lot of guess work on currency; the trick is to exchange funds when you can grab 2-5 cents moves in your favour, and one of the services that give you a better exchange rate.
The downside to my recent strategy is limited participation in the hot US tech sector, but I've done well in Cdn energy/mining/banks in the recovery as a substitute. BMO has some currency hedged etfs like ZQQ to get broad based IT exposure in CDN$. I may go that route if US IT corrects, or some of the Emerge etfs are interesting.
The downside to my recent strategy is limited participation in the hot US tech sector, but I've done well in Cdn energy/mining/banks in the recovery as a substitute. BMO has some currency hedged etfs like ZQQ to get broad based IT exposure in CDN$. I may go that route if US IT corrects, or some of the Emerge etfs are interesting.
Hedging makes sense if you want your portfolio to be consistent in one currency (say CAD) but you're holding both CAD and USD investments. For example, if you have $100K (CAD) in US stocks you can sell $100K (CAD) USD.CAD and now you're flat USD. I use IB to do this. Very easy and cheap. On IB there are 2 ways to do a currency conversion: FXCONV and IDEALPRO. FXCONV does a straight conversion and settles in cash. IDEALPRO holds a position in the currency pair (long or short). For hedging don't use FXCONV.
It sounds like IB has a superior method for traders to hedge FX fluctuations.
CME FX is NOT illiquid for the larger names. Many small lot orders, but the order book is populated. Yesterday the CAD Dec future traded 64,162. Volume in March was 4,681. The Dec-Mar calendar spread is one tic wide and thick, so rolling is not a problem. The notional value for one futures contract is 100,000 CAD.
CME FX is NOT illiquid for the larger names. Many small lot orders, but the order book is populated. Yesterday the CAD Dec future traded 64,162. Volume in March was 4,681. The Dec-Mar calendar spread is one tic wide and thick, so rolling is not a problem. The notional value for one futures contract is 100,000 CAD.