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North America Topics specific to Canada and USA/Alaska only.
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  #1  
Old 26 Apr 2012
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Location: Toronto, Canada currently in South America
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Canadian citizen/resident: does US funds account makes sense for long trip?

As a Canadian citizen, does it make sense for me to have an US funds account? What do other people do?

The context is a longer trip (a year?) through South America, parts of Africa.

I guess it is always a gamble, but since I have some funds for the trip saved, does it make sense to "convert" some of it to US dollars when the exchange rate is good to hedge against the possibility of the Canadian dollar tanking? Of course it could go the other way.

Based on a previously trip (3 months) in Central and South America, I used ATMs frequently enough to make me question whether there is "more bang for the buck" to have my "source" currency as Canadian dollars vesrus US dollars.

Any pointers would be welcome.

Cheers.

Adam
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Old 26 Apr 2012
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A detailed discussion of F/X strategy is probably beyond the scope of this site but in short it's 50/50 whether you should stick to CAD or convert to USD.

F/X speculating is a pretty tough racket, for every group that thinks a currency is going to go up, another one thinks it's going to go down. It's too complex for almost any one individual to figure out and is best left to institutions with super computers and economists on staff.

F/X hedging on the other hand is pretty common practice for businesses who realize that it is nearly impossible to predict exchange rate fluctuations and therefore hedge their positions to mitigate risk.

The key thing to keep in mind is that they typically hedge by converting to the currency that they need to pay their bills to eliminate exchange rate risk.

In your case, you are considering converting to USD which will then have to be converted to the local currency in the countries you visit so you will still have exchange rate risk, you have just changed the risk from holding CAD to holding USD.

You also have to add on top of that the additional transaction costs of that extra step (converting CAD to USD), for ease of calculation say 2%. In addition, you have the opportunity cost of the loss of interest on your current savings as you can get ~2% at a few credit unions while the interest on USD investments is quite low. So if you plan on travelling in a year, the USD/CAD exchange rate has to strengthen by ~4% before it would be more beneficial to hold USD instead of CAD.

In the long term, one very general way of determining what relative exhange rates should be is using purchasing power parity and depending on who you ask you'll get an estimate of a USD/CAD exchange rate of $0.82-$0.92. If this happens, when this happens, and how long it will take to happen is anybody's guess.

The call is of course up to you. IMHO, short term, probably not worth the bother. If it was long term, then it would probably be a reasonable bet to hold some USD.
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Old 1 May 2012
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Location: Toronto, Canada currently in South America
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Thanks for your input MountainMan. This is food for thought and gives me some context for further research.

Cheers.

Adam
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