Finding purchasing power parity

Dec 09, 2016 | Dian Chaaban


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After many years of telling them to do it, my parents are finally taking the “snow-bird” plunge and are easing into the process by investing in a new-build where it all started for them, Lebanon. My in-laws have already been flying away to Florida every winter for years and as do many of my clients – a few short days after Thanksgiving, like clockwork.

An interesting thought to consider when your recurring years are split between two climates (or two countries) is the purchasing power of your dollar when you are exchanging currencies. Do you have a strategy for that? For instance, if you know that you have upcoming expenses in USD every year, are you hedging the dollar to your advantage in advance or just FX’ing as you go?

I'll be the first to admit that predicting currency trends is as easy as predicting the weather, i.e. no one can seem to get it quite right – and that’s because there are so many moving variables (inflation, economic conditions, political events, etc). Investopedia suggests that there are 4 ways to predict currency (watch the video here) but the bottom line is that forecasting exchange rates is a very difficult task, and it is for this reason that many companies and investors simply hedge their currency risk.

Those of us who aren’t snow-birding may also consider this strategy if we have planned travel to a destination in Europe next year, for example, or on the flip scenario of having moved to Canada for your retirement – if your pension is being paid to you in another currency, you may way to hedge the risk of taking a haircut (or getting a raise), depending on the subscribed currency relative to our loonie (I just had a conversation about this today in fact).

No matter how you slice it, your purchasing power is your ability to maintain your lifestyle – and there are many planning components to your financial plan to help address this, such as keeping up with inflation, hedging currency and generating tax efficient income, to name a few.

While it’s hard to predict, you can click here to read our monthly currency report card if you’d like to take a peek at how we suspect the major currencies will trend over the next ~12 months, we aren’t right all the time but we’re pretty close.

With so much going on and information coming at us from every angle, it's sometimes hard to keep your finger on the pulse of what's happening. In an effort to keep you in-the-know and provide you with some conversation nuggets for the weekend, I've compiled the following hit list to fill your conversation pipeline.

Now you are in-the-know with Word on the Street.