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Canadian investors need to protect themselves against falling euro, say advisers

Ross Marowits, THE CANADIAN PRESS

MONTREAL - Years after parity with the U.S. dollar seemed like an unlikely concept, wise Canadian investors are increasingly protecting themselves against a march towards parity with the euro.

The Canadian dollar has appreciated by 22 per cent against Europe's common currency over the past 16 months and by 11.5 per cent in the last four months alone.

Entering 2009, it cost C$1.7046 to purchase a single euro. That fell to C$1.50 in January and was down to C$1.33 Thursday during a volatile day of trading on both currency and equity markets.

The Canadian dollar has also gained ground against the British pound over the last 16 months, but at a slower pace. The pound was trading at C$1.56 Thursday.

The shifts are welcome news for Canadian tourists who eagerly anticipate not being quite so weighted down by Europe's high prices.

But it is yet another challenge for exporters and Canadian investors who face whittled down returns.

The situation promises to worsen as signs on both sides of the Atlantic point to a continuation of the trend. Canada's economy is gaining steam and is among the most sound in the G7, while Europe faces growing uncertainty about the sovereign debt of Greece and other countries.

"Parity seemed so far-fetched when we were at C$1.70, but it's not so far-fetched anymore," says finance author Gordon Pape.

Pape expects the loonie will slowly inch closer to parity over the next few years, even if it doesn't quite cross the finish line.

"We're always comparing our dollar against the U.S. dollar and we've kind of lost sight of what's happening against other world currencies," said Pape, who sounded the alarm in a recent newsletter to investors.

Just as Canadians face currency considerations in making investments in the United States, they must now factor in the euro when considering real performance of European investments.

Paper said investors should be wary of investing in Europe unless they aggressively hedge to protect against currency swings. The eurozone is in crisis and there's no way of knowing how it will play out, he added.

George Davis, chief currency technical analyst for RBC Capital Markets, doubts the dollar will reach parity with the euro.

"I think that might be a little bit of a stretch," said Davis, who like the others was interview before Thursday's wild currency swings.

"(But) in these markets, one of the things we have learned over the last few years is that you can never really say never about anything."

Who would have thought a few years ago that Lehman Brothers and Bear Stearns would disappear, he noted.

Davis said the coming few weeks will be telling as Europe looks to ratify a bailout for Greece amid public unrest in that country. And further currency movement would likely result if the problems spread to Spain, Portugal and Italy.

"If we continue to see that kind of backdrop, then that would certainly be a risk to support the Canadian dollar even further," he said.

The focus now is on whether the euro will reach the low of 1.2470 it set against the Canadian dollar in 2000, Davis said, adding that he expects the pace of depreciation will slow as it approaches that threshold.

Camilla Sutton, foreign exchange currency strategist at Scotia Capital, agrees the euro will continue to depreciate but can't see how it could sink below the 1.15-to-1.18 range against the loonie.

"I think we're still a fair ways from parity here. We'd really need to see an awfully strong Canadian dollar and I don't think our economy can hold up to that," she said.

Sutton also believes the U.S. dollar doesn't have the strength it needs to push the euro back down to parity because the world's largest economy is weighted down by many factors, including its own massive debt.

But even if parity isn't reached, a further depreciation of the euro leaves investors exposed to currency risk, she said.

Sutton said many retail investors often neglect to consider currency swings, even though they can have a significant impact when investing globally.

"You have to spend as much time looking at the currency piece of the investment as you do the actual asset itself," she said.

Small investors who don't have access to large hedging programs can still invest in Europe through mutual funds that include imbedded hedging, Sutton added.

Currency hassles may persuade many Canadian investors to keep their money within the country to avoid this risk. But the search for asset diversification will continue to drive overseas investments because the Canadian index lacks many large conglomerates or tech companies, she said.