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Capturing the Canadian-U.S. dollar trade



In addition to oil, currency is another asset class that is very topical for investors these days. In the last three weeks, the U.S. dollar has had its largest rally since the onset of 2016, up 3.1%, as at May 26, 2016, moving to $1.29 from $1.25 in Canadian dollar terms.

Yet, when we think of profiting from the appreciation of one currency relative to another, we shy away. A direct investment in currency trading might seem too complicated or expensive.

Ironically, outside of the capital markets, we try to profit from currency disparities all the time. Think of the times you may have driven across the border or visited a U.S. website to see if various consumer goods like shoes or TVs were cheaper on the other side of the border (after taking into account the exchange rate, cost of gas or shipping, of course).

Prior to the advent of currency ETFs, ‘pure play’ currency trading was very difficult for the average retail investor. Previously, investors who were looking to capitalize on Canadian dollar movements had to do so via a currency broker or currency trading platform — both of which have restricted access for retail investors due to the minimum trading balances and specific margin requirements. While retail investors could make smaller trades directly with a financial institution, these transactions typically charge higher conversion fees and exchange rates for transactions under $10,000.

This is why in 2011 we created the Horizons US Dollar Currency ETF (“DLR”), which reflects the value of the U.S. dollar in Canadian dollar terms by investing in cash and cash equivalents dominated in U.S. dollars. If you are bullish on the U.S. dollar, relative to the Canadian dollar, DLR is a tool that can make capitalizing on this relationship easier and less expensive, since the approximate appreciation of the U.S. dollar is reflected in the unit price of the ETF.

For example, in the 12-month period ended December 31, 2015, the U.S. dollar appreciated approximately 19.1%. During this same period, the ETF appreciated almost the same amount (18.58%), with its unit price moving to $13.79 from $11.63 a unit, the slight difference in returns being primarily the management fees of the ETF.

Conversely, if you want go long the Canadian dollar (you think it will appreciate against the U.S. dollar), we recently launched the Horizons Canadian Dollar Currency ETF (“CAN”) in early May, which reflects the value of the Canadian dollar relative to the U.S. dollar. Recall that the Canadian dollar has appreciated 6.9% YTD (as at May 13, 2016); had CAN been available throughout this period, its unit price would have been expected to reflect a similar return.

By using an ETF to capture a perspective on the Canadian-U.S. dollar trade, investing in currencies is now as easy as placing a trade in your brokerage account. However, if you’re still reluctant, there’s always waiting until your next shopping trip south of the border.

The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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