Is this the best time to convert USD to CAD?
The phone lines are jammed by customers asking that very question, which is to be expected after the Canadian dollar has lost over ten percent of its value against the US dollar, since the beginning of March. It’s a simple question, but there is not a simple answer. The most important question is “when do you need the funds?” If it is in the next few days, then the answer is “most certainly.”
Before deciding it is the right time to sell US dollars, it may be worth reviewing the reasons for the FX market turmoil. The Canadian dollar was under pressure from the beginning of the year. Traders were expecting somewhat of a rally following the signing of the US/China and USMCA trade agreements. That didn’t happen because of the outbreak of the coronavirus (COVID-19) in Wuhan, China, which led to China’s economic growth grinding to a halt, and sparking fears of a global economic slowdown. Those fears proved warranted when COVID-
19 spread around the globe.
Central banks, including the Bank of Canada, took note and adopted dovish monetary policies to help support their economies. The Saudi Arabia/Russia oil talks deteriorated into an all-out price war, leading to a 60% drop in West Texas Intermediate (WTI) prices in less than a month. The panic in global markets really took hold when the World Health Organization (WHO) declared the COVID-19 outbreak as a pandemic. Global investors headed for safe- havens, and their preferred destination was the US dollar. The US dollar soared, and the Canadian dollar plunged, alongside the other major G-10 currencies.
Is now a good time to convert US dollars to Canadian?
The impact of COVID-19 on global economies is a long way from being over. International borders are closed or restricting travel. Major population centres around the world asked their citizens to stay home. Many retail outlets and businesses are closed—employees who can are working from home. However, government leaders and Finance Ministers are pulling out all the stops to halt the panic. On July 13, the G-7 met and agreed to concerted efforts to support financial markets.
The European Central Bank pumped liquidity into markets with a vehicle aptly named the “Pandemic Emergency Purchase Program.” President Trump is talking about a trillion-dollar stimulus program. The Fed slashed the overnight rate to close to zero. The Bank of Canada cut its benchmark rate twice, and the Government of Canada announced what could be an $87 billion coronavirus economic stimulus package. The massive amounts of fiscal and monetary stimulus may just be enough to limit further panic selling. Although risk sentiment is very poor, the magnitude of the Canadian dollar losses in 2020, suggests that converting some US dollars at current levels may be prudent.
To put it in perspective, eight years ago this month, the Canadian dollar was worth more than the US dollar. At one point in March 2012, Canadians could buy $1,000.00 US dollars for just 980.00 Canadian dollars. On March 18, 2020, that same US $1,000 purchase would cost CAD $1,465.00. The nearly 50% depreciation of the domestic currency suggests selling US dollars at current levels may not be a bad idea.
Furthermore, the steep Canadian dollar devaluation in the past few weeks is an anomaly. A 10% devaluation in such a short time, is unheard of in the past 20 years, which makes the case for selling US dollars more compelling. After dropping to 68.08 US cents to 1.00 Canadian dollar In January 2015, the Loonie bounced around in a 72.50- 80.00 US cent range until the end of February. That changed in March and now the currency is trading just below its five year low. It also suggests converting some US dollars to Canadian dollars isn’t a bad idea.
For companies with regular US dollar receivables, it is an easy decision, especially when compared to the 2019 trading range. The USDCAD trading range in 2019 was around 1.2950 to 1.3650, and with the currency pair closing the year at 1.3050, many expected a similar range for this year. Many CFO’s budgeted their cash flow using an
estimated rate of 1.3300. For them, selling US dollars at current levels is a no brainer.
Canadian companies with predictable US dollar cash-flows should consider mitigating future wild currency fluctuations by adopting a conservative, hedging program. A simple, yet effective method for smoothing out currency swings is to sell 50% of your confirmed US dollar receipts, on a rolling three-to six-month basis. For example, if you receive US dollars on the 25th of each month, you sell ½ of the amounts today, for value March 25, April 25, May 25, etc. This simple strategy helps smooth FX rate fluctuations over the year, think dollar cost
The answer to the question of whether or not it is a good time to sell US dollars will be known in time but in this environment the adage that “bulls make money, bears make money, but pigs get slaughtered, is applicable.