The Canadian dollar went on a big rally since early May. Although it has pulled back slightly in August I wanted to share some thoughts on how currency fluctuations impact our portfolios. At the macro level when I see the Canadian dollar going up my thought is that there is demand for our loonie.
At the portfolio level, our unhedged global or US ETFs get hurt because when the CAD is going up that means the currency that we own in those ETFs is going down. On the flip side, when the CAD goes down these ETFs thrive. In the short term it is tough to know what impact currencies are going to have so what can we do to protect our portfolio? The answer is that we allocate a small portion to the unhedged ETFs and a bigger portion to the hedged ETFs which are not impacted by changes in currency fluctuations.