The Power of the Canadian Dollar
May 29th, 2008 by Kevin
The Canadian dollar continues to show strength against the greenback. For Canadian investors it is an ideal time to be looking at investments that are in US dollar denominations. Offshore real estate in Central America is no exception.
As a youngster growing up in Canada, it was just a given that when you went to the US for vacation, you were going to lose money on the exchange. And when I graduated university and worked for a consulting company and traveled to the US for work, I was so glad the company was paying my expenses with exchange rates at 65 cents or less on the dollar! You would always hear stories about the time in history (early 70’s) when the Canadian dollar was higher than the US dollar. In 1976, the loonie saw its last parity with the US greenback and fell steadily until a low point in 2002.
Now we have been witnessing for over a year exchange rates that parallel those of the early 70’s! The loonie went above 90 cents in May 07, and has stayed roughly on par since October 07.
Historically the Canadian dollar pretty much moves in tandem to the US greenback but somewhat less dramatically. Part of this is due to how connected these two countries are in terms of trade. In the past and still today much of Canada’s exports flow to the US. With higher Canadian dollars Canadian imports become much more expensive. Canada, like most countries is a much more global economy, but there is still very strong economic ties to its southern neighbor.
I personally moved some Canadian currency down last year to invest in some local property. I still have the exchange slip that shows an exchange rate of 1.06! I probably made more money due to the currency increase over the past year than many years prior investing in mutual funds. For Canadian investors this is an ideal time to be exchanging some US currency that can be used to invest now or in the future. If history repeats itself, which it likely will, the Canadian dollar will drop back down, so even by doing nothing with the newly purchased greenbacks, as a Canadian investor you have the opportunity to make a decent return on the money regardless. Lets take an offshore investment scenario with some property in Nicaragua:
You ‘buy’ greenbacks for 1.03, to invest in some offshore real estate worth 40k in Nicaragua. It costs you 38,835. (3% immediate return) You hold the investment for 5 years. By that time the US market has started to turn around, more investors worldwide are starting to look at property in this region. Lets say that the property has doubled in value (not a stretch in early stage growth markets) and at the same time, the US currently has strengthened so the Loonie is trading at a reduced but still respectable rate of 86 cents on the dollar. The property is worth 80K US to you, and at .86 it is valued at 91,200 in Canadian dollars. As a US investor you would have 100% return in 5 years, but with exchange rates factored in you actually received 128% return on the original Canadian dollars invested!
Lets take an even more conservative/dire approach and say that the property just broke after 5 years. A US investor would have a 0% return over that time period, but a the Canadian investor would still produce a 17.5 % return due to the exchange rate shifts.
Take advantage of this powerful buying opportunity now, while the rates remain in your favor. Don’t look back a year or two from now saying “I should have taken action when the dollar was on par!”.
