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From the beginning of 2024 to January 2025, the loonie fell nearly 8% against the U.S. dollar, reaching a two-decade low of C$1.44 from C$1.33 at the start of the year. This decline has raised concerns among Canadian investors about preserving their wealth amidst currency volatility.
Factors Contributing to the Loonie's Decline
Several key factors have influenced the recent downturn of the Canadian dollar such as the political uncertainty given the annouced resignation of Prime Minister Justin Trudeau in late 2024 which has introduced a period of political instability, affecting investor confidence and contributing to the currency's depreciation. Monetary policy is another cause of this, given the Bank of Canada has been reducing interest rates more aggressively than the U.S. Federal Reserve, leading to a widening interest rate differential. This disparity makes Canadian assets less attractive to investors seeking higher yields, contributing to the loonie's depreciation and worries of continued inflation. The largest single factor of this however, can be seen with the continued trade tensions between our largest trading partner. The proposed 25% tariff on Canadian imports by the U.S. in February 2025 has further strained economic relations and led to sharp declines in the Canadian dollar.
In the immediate aftermath of the tariff announcement, the loonie dropped 0.5% against the U.S. dollar, hitting a 22-year low of 1.4793 per USD before rebounding slightly. Investors initially feared an economic slowdown and weakened export competitiveness, compounding concerns about Canada’s trade balance and inflation.
The Bank of Canada has warned that prolonged trade conflicts and tariffs could lead to continued depreciation, as foreign capital inflows weaken and manufacturing confidence declines. Canadian manufacturing activity slowed in January 2025 due to looming tariffs, while bond yields fell, reflecting investor uncertainty.
Analysts project that the implementation of the tariff could reduce Canada's GDP by 1.2% over five years and contribute to an inflation increase of up to 1.7%. Additionally, the loonie has already weakened by 7% in the past 12 months, with further depreciation likely if trade tensions persist.
Strategies for Protecting Investments
In light of these challenges, Canadian investors can consider several approaches to mitigate the impact of a weakening currency:
Diversify Internationally: Allocating a portion of your portfolio to U.S. and other international equities can provide exposure to stronger currencies and economies. This strategy not only hedges against domestic currency risk but also opens avenues for growth in global markets. (rbcgam.com)
Invest in Commodities: Assets like gold have historically served as safe havens during periods of currency devaluation. Canadian investors have notably increased their holdings in gold and uranium stocks as hedges against economic uncertainties and trade tensions. (reuters.com)
Utilize Currency-Hedged Instruments: Incorporating currency-hedged investment options can protect against exchange rate fluctuations, ensuring that returns are not eroded by a declining loonie. (moneysense.ca)
Hold Foreign Currency Assets: Maintaining a portion of your savings in foreign currencies, such as U.S. dollar accounts or money market funds, can provide a direct hedge against a weakening Canadian dollar.
Case Study: Sarah's Smart Move
Let's say Sarah, a retiree in Ontario, was worried about the Canadian dollar back in the fall of 2023. She had most of her savings in Canadian investments. Working with a financial advisor, she made some changes:
Shifted 20% of her stock portfolio into U.S. and international equity ETFs.
Added a 5% allocation to a gold ETF.
Opened a USD savings account and transferred a portion of her cash savings.
When the Canadian dollar dropped over the next few months, Sarah's U.S. and international investments increased in value when converted back to Canadian dollars. The gold also helped cushion the blow. While her Canadian investments might have seen a smaller return due to the currency shift, her overall portfolio was protected. She didn't make a fortune, but she avoided a significant loss.
Learning from Sarah:
Sarah's story shows that you don't need to be a financial expert to protect yourself. The key takeaways are:
Don't Panic: Currency fluctuations are normal.
Diversify: Don't keep all your money in one place (or one currency).
Be Proactive: Don't wait until a crisis hits to make changes.
Get Help: It takes time to become knowledgeable, experienced, and stay on top of investment trends.
The Bottom Line: It's Complicated!
Managing all of this – currency risk, investments, debt, and staying on top of the news – can be overwhelming. That's where firms like DO Wealth come in. We help people like Sarah create personalized plans to protect and grow their money, no matter what the Canadian dollar does. We take the stress out of investing, so you can focus on what matters most. This proactive, professionally-supported approach is key to achieving long-term financial goals.
This information is for educational purposes only and not financial advice. Consult with a financial advisor to develop a strategy tailored to your individual circumstances.
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