Myth - Someone knows where the exchange rate is going

We don't know how many times people have asked for our opinion on where the Canada/US exchange rate is going. The resounding answer is we have no idea but in our view "A bird in the hand is better than 1.01 birds in the bush." First, as seen in the graph below, waiting for a better exchange rate has been the wrong thing to do over the past 33 years. Second, in 1971 who knew that this would be the case? It appears the record high closing rate for the Canadian dollar occurred on 8/31/57 and 10/31/59 at $1.05485, with the record low closing being set 1/18/2002 at $0.61989. For you history buffs, you can find a listing of historical exchange rates at the Bank of Canada.

There are a number of factors that influence Canadian/US exchange rates that make it impossible to predict where it is going with any consistency. The causes of currency exchange fluctuations are something economists love to talk about at parties. We claim limited knowledge in this area and offer you the following key factors that the experts agree influence the Canada/US exchange rate:

	The difference in inflation rates between Canada and the US.
	The difference in productivity performance.
	The tax system and the tax burden imposed on the citizens of both countries.
	The difference in interest rates.
	The difference in non-energy commodity prices.
	The difference in trade and current account balances.
	The difference in fiscal balances.
	The economic growth prospects of each country.
	The political issues and political stability in each country.
	The need to borrow money by each government.

With all of this economist jargon said, the bottom line is whichever currency is more desired by the world, that currency will enjoy a higher exchange rate. It is simple supply and demand and unfortunately, the world wants US dollars more than it wants Canadian dollars at this time. There are many things economists have theorized about to fix the problem including abandoning the floating currency and adopting the US currency wholesale, "pegging" the Canadian dollar to the US dollar or forming a North American "dollar" with the US and Mexico. We will leave all of this to the economists but the question to ask is "What do we do now?"

If you have a need for US dollars into the future, be sure you have US dollars available and quit "currency speculating" on where the exchange rate is going to go. Likewise, if you have a need for Canadian dollars into the future, be sure you keep some Canadian dollars to meet that need. We have seen folks devastate their US retirement plans because they decided to currency speculate and leave their money in Canadian dollars when they had an on-going permanent need for US dollars. They have watched their retirement nest eggs decline significantly and keep hoping for the Canadian dollar to bounce back. What a way to spend your retirement . . . glued to the newspaper watching the exchange rates!