Monarch Wealth

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What the Recent USD Strength Means for Canadian Investors

A quick update on recent CAD/USD volatility

Recent moves in the Canadian and U.S. dollar exchange rate have raised some good questions from clients, so I wanted to share a quick update.

We recently received commentary from Fidelity Investments, one of the third-party managers we use, and specifically from their professional Global Asset Allocation team. Their update was helpful because it separates the short-term currency noise from the longer-term view.

The short version

While the U.S. dollar has been strong recently, Fidelity’s longer-term view remains that they continue to prefer the Canadian dollar over the U.S. dollar over time.

In their view, the recent strength in the U.S. dollar looks more tactical than structural. In other words, this may be a shorter-term move driven by current conditions rather than a lasting shift.

Recent CAD/USD Volatility – 1 Year History (note volatility in the last couple weeks)

What has been driving the move?

Fidelity points to a few main reasons:

• Higher U.S. real interest rates, which have supported the U.S. dollar

• A more hawkish (less likely to cut interest rates) Federal Reserve (US central bank)

• Earlier concerns about Canadian growth and sticky inflation

At the same time, they note that recent Canadian data has improved. Their update highlighted April GDP growth of 0.5%, with early Q2 indicators pointing to growth running above 2% annualized. They also noted that oil and gas has helped support the Canadian backdrop.
 

Why this matters for investors

Currency moves can affect returns on foreign holdings in the short term, but they are only one piece of the puzzle.

The bigger takeaway is that it usually does not make sense to build a portfolio around short-term foreign exchange moves. Fidelity’s positioning continues to reflect reduced U.S. dollar overweight exposure and ongoing diversification into other global currencies and gold.

That lines up with how we think about portfolio construction as well: stay diversified, stay disciplined, and avoid overreacting to short-term market swings.

CAD/USD Exchange Rate Over Last 10 Years

(Broad movement in the CAD relative to the USD, highlighting that currency moves are cyclical.)

Our view

The recent U.S. dollar strength is worth watching, but not overreacting to.

Near term, the U.S. dollar may continue to find support if rates stay elevated or markets remain cautious. Longer term, however, there are reasonable arguments for the Canadian dollar to be better supported and do better than the USD.

Recent U.S. dollar strength may be meaningful in the short term, but long-term investors are generally better served by diversification than by trying to time currency moves. And we continue to have a strategic over-allocation to CAD assets as a long-term strategy.
 

Source: Commentary from Fidelity Investments’ Global Asset Allocation team, a third-party investment manager we use, along with publicly available market data.

Cheers,
Matthew