Currency Exchange and Stock Purchase Pt.2

[Russellhantz]

I posted something similar a while back and the conclusion was the exchange rate shouldn't impact the purchase of a stock.

But what happens if it is near historic level difference?  Right now I would like to invest $5000 CAD in Hershey.  The CAD to USD is 1.34.  If the historic average exchange rate is, lets say 1.25; if I ever sell Hershey I immediately lose 9% of my initial investment.

I'm just trying to wrap my head around this.  Is my thinking totally off?  I'm pretty eager to start some positions in some US stocks but having trouble rationalizing it with the current exchange rate.

[crimsonghost747]

Well. If you sell Hershey and then convert those back to CAD at 1.25 then in that case yes, you lose a bit on the currency. Thing is, you have absolutely no way of knowing if it will be 1.25 when/if you decide to sell. Could be 1.40. And who says that you have to convert them back to CAD when selling? You can just keep the USD and reinvest that into other stocks in the NYSE.

One thing to consider is the dividends... they are being dished out in USD but you obviously use CAD for daily expenses so in the long term that would be something to consider. In the short term, the dividends coming in USD can just be reinvested into the market.

[Roadmap2Retire]

Hey Russellhantz,
Ive been thinking a lot about this too lately, but I continue to buy US equities even though we are at 1.34.  Where will the exchange rate go? I dont know. The current consensus is that the US$ will continue to grow stronger.

One aspect that I find comforting is: even though I am paying more for the initial purchase, the dividends received are also in US$, which means that the dividend rewards are also juicier

Personally, I think there are two ways to take advantage of this currency trend (until the US$ tops off):

1. Look for companies with a lot of earnings in the US and reports in CAD$ (the strong US$ will help the balance sheets and overall financials). Off the top of my head - I can think of RY.TO, TD.TO, CNR.TO, (ENB/TRP perhaps?).  
   
2. Companies trading on TSX but report financials in US$ - and more importantly, the dividends are declared and issued in US$. Companies include: AGU.TO, AQN.TO, MG.TO, BIP.UN.TO etc. I own these companies - so my returns are just that much more juicier. Note that depending on the company - if it has a lot of operations outside US, then the strong US$ also means that there are medium term headwinds because of the fact that the financials are reported in US$.
   

Remember that this little tweak will not work out so great after the US$ top offs and/or if the CAD$ gets stronger. This is more of a short/medium term tailwind.

[Russellhantz]

Thanks very much guys. Super helpful. Just gotta go for it I guess! It's going to be painful to see 5k converted but will think long term.

[crimsonghost747]

I had those same pains when converting eur to usd at 1 to 1.15 since I had gotten used to it being 1.30 or even 1.40. Now we are at 1.10 and still counting down to parity.