{"id":19537,"date":"2020-09-11T09:00:03","date_gmt":"2020-09-11T13:00:03","guid":{"rendered":"https:\/\/www.benefitscanada.com\/news\/why-canadian-pension-funds-should-care-about-a-slumping-u-s-dollar-149583"},"modified":"2020-09-11T09:00:03","modified_gmt":"2020-09-11T13:00:03","slug":"why-canadian-pension-funds-should-care-about-a-slumping-u-s-dollar","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2020\/09\/11\/why-canadian-pension-funds-should-care-about-a-slumping-u-s-dollar\/","title":{"rendered":"Why Canadian pension funds should care about a slumping U.S. dollar"},"content":{"rendered":"
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\"Copyright <\/div>\n<\/p><\/div>\n

Martha Porado<\/span> | September 11, 2020 <\/p>\n

The coronavirus pandemic has hit the U.S. dollar hard, disrupting a dynamic that Canadian pension funds have taken advantage of for years.<\/p>\n

Unhedged exposure to the U.S. dollar has been a boon for Canadian pensions as they\u2019ve reaped the extra returns from the favourable conversion of asset income back into Canadian currency. But the outlook for the U.S. dollar is looking sketchier than it has for some time, says Aaron Hurd, senior portfolio manager at State Street Global Advisors.<\/p>\n

\u201cYou just had a nine-year Canadian dollar bear market and the U.S. dollar added enormous tailwinds to performance on a trend basis. On top of that, you have the nice \u2014 albeit temporary \u2014 diversification during little shocks like December 2018, to some extent, but mostly with March, where you go from $1.34 to $1.47 in a matter of weeks, as equities collapsed. So that\u2019s obviously great diversification.\u201d<\/p>\n

Read: Back to basics on currency hedging<\/a><\/strong><\/p>\n

While the nearly decade-long cycle was positive for Canadian investors, the next nine might not be so kind, he says. \u201cGiven the size of the U.S. component for the majority of Canadian institutional portfolios, if you\u2019re giving up, we would expect upwards of two to three per cent a year on the currency over the next five years, that\u2019s a significant drag on your overall portfolio return.\u201d<\/p>\n

Historically, the U.S. dollar\u2019s strength has proven quite cyclical, notes Hurd, swinging anywhere between 30 and 40 per cent over seven- to 10-year spurts. With most now expecting the U.S. to require a longer recovery period from the economic impacts of the pandemic, as well as a contentious election expected in November, there\u2019s no end in sight for the pressure the currency\u2019s under.<\/p>\n

Read: Why dynamic hedging is a good option for managing currency risk<\/a><\/strong><\/p>\n

Going forward, many factors \u2014 pandemic-related or otherwise \u2014 will rattle equity markets, says Hurd. \u201cIn those isolated shocks, you do enjoy some diversification benefits. The problem with using unhedged U.S. dollars as a way to mitigate or diversify equity risk is that it\u2019s a very expensive way to do that, for a couple of reasons. One is, it\u2019s very temporary. Most institutional investors are very long horizon and that protection works for a month or two and then immediately reverses. . . .<\/p>\n

\u201cAnd, on average, over the long-term, Canadian investors are paid to hedge. Canada\u2019s a small economy; it\u2019s interest rates tend to be slightly higher than U.S. interest rates. So you get paid to hedge over time and you give that up if you go unhedged for the diversification.<\/p>\n

\u201cRight now, we\u2019re fresh off the period where that diversification helped. . . . And we\u2019re coming to the end of a nine-year period where just the trend returns from being unhedged were amazing. So this is going to be very easy for Canadian investors to underestimate.\u201d<\/p>\n

Read: What are the implications for pension funds coming out of coronavirus crisis?<\/a><\/strong><\/p>\n

Read the full article at BenefitsCanada.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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