How to protect yourself from a weakening currency

A TD Bank analyst predicts the loonie, which is currently worth about 75 cents US, could fall to 71 cents US sometime in 2019.

At 71 cents US, one U.S. dollar would cost $1.40 Cdn, compared to approximately $1.35 Cdn today. Another analyst from Fidelity is even more pessimistic, believing the loonie could drop by 17 per cent, to 61 cents US, with one U.S. dollar costing $1.61 Cdn.

Both analysts are concerned about the Canadian household debt-to-income ratio. Too much of our disposable income is being used to service our debts instead buying products or paying for services.

Since consumer spending is a major economic driver, any weakness in spending negatively impacts our economy and the Bank of Canada's ability to raise interest rates. The bank may even cut rates.

In contrast, the U.S. Federal Reserve will likely keep rates "as is" in 2019.

Money isn't loyal

Money isn't loyal. It will flow to whomever is offering the highest interest rate. Since interest rates are higher in the U.S., the analysts expect capital to leave Canada in favour of the U.S. The result would be negative for our loonie and positive for the U.S. dollar.

Also, according to the C.D. Howe institute, $100 billion worth of Canadian energy projects have been cancelled or delayed since 2017. Much of those investment dollars, previously destined for Canada, are being re-directed to the U.S. energy sector.

As a result, there will be an uptick in demand for U.S. dollars, which will increase its value.

It is important to note that forecasting currencies is very difficult, because there's a good chance that the predictions will be proven wrong.

For example, in late 2015, several analysts predicted that the loonie would drop to 55 cents US. This caused a rush of selling of the Canadian dollar and its value dropped from 77 cents to 68 cents US.

However, once all the seller pressure was exhausted, the loonie promptly rebounded to 79 cents. It never came close to hitting 55 cents.

A weakening currency isn't necessarily a bad thing, particularly as we are an exporting nation. The lower the loonie goes, the more attractive our goods and services are to foreign buyers.

This makes our exporters happy as they sell more internationally. Local buying also increases, as Canadians are less likely to go cross-border shopping — which is good for our retailers.

The flip side

On the flip side, goods that we import become more expensive — particularly food. A lot of our meat, fruits and vegetables come from the U.S. So, when the loonie weakens, you should expect to pay more at the grocery store.

My personal view is that the U.S. dollar will strengthen over the short-to-medium term. For that reason, I have shifted some (not all) of my assets to into U.S. denominated investments.

I like to keep some U.S. dollars on hand as it gives me the flexibility to choose which currency to use when travelling or investing. If you have upcoming plans to travel to the U.S., I recommend hedging your bets by buying some U.S. dollars today.

For example, if your budget is $3,000 US you could convert half now, and half before your trip.

You should also review your investment portfolio. Canadians tend to be overly invested in the Canadian stock market. Make sure your portfolio is properly diversified across the globe.

In recent conversations with money managers, they informed me that they have been reducing their Canadian exposure in favor of U.S. and Global equities/investments.

For those holding larger amounts of U.S. dollars or equities, consider opening a U.S. dollar-denominated Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). You can keep your investments in U.S. dollars while participating in the tax sheltering or deferral benefits offered by these registered plans.

This column is part of CBC's Opinion section. For more information about this section, please read our FAQ.