Moving Back to Canada - Foreign Exchange

This is one of the trickier aspects of returning to Canada for citizens who have lived abroad for many years and want to repatriate some or all of their money back to Canadian dollars held in Canada. There are several aspects to foreign exchange considerations:

Timing - the most important one.
Hedging - balancing your risk.
Offshore banking - where to keep your money so it is safe and so you can move it quickly and easily around the world to take advantage of opportunities and your changing personal circumstances.

Part 1: Timing

The key word to understanding foreign exchange is: Timing

When moving back to Canada some years ago, I personally fell into the trap of wanting to have my money in Canada when I arrived back. I converted our holdings to CAD and set up life here in Canada with those funds. Due to exchange rate changes in the months preceding our return, I lost CAD 14,000 on the conversion rate difference from my earlier projections. Had I waited for a more favourable rate, I could have recouped most or all of these lost monies. As exchange rates go up and down over the years in fairly clear patterns, timing becomes the key variable.

As of the writing of this document, the Canadian dollar (CAD) is above the US$ (USD). Given this situation, should you convert some or all of your foreign currency back to Canadian dollars right now?

If you are considering converting USD, this is a tricky question due to massive U.S. economic problems. See below for a more in depth look at the USD - CAD dilemma.
If you are converting from Euros (EUR) to CAD, one year ago the rate was the same as it is as of the writing of this article. There have been ups and downs in the exchange rate, but there seems to be less volatility as compared to the USD - CAD rates. So perhaps there is less of a timing issue if you want to convert EUR to CAD.
Francs, Pounds, Pesos, or other currencies? Check out some of the considerations, below, before deciding when to convert your foreign currencies back to CAD

In summary, timing is the key consideration for moving some or all of your monies back to Canada when you are returning to reside here.

Timing Considerations: "When should I convert to CAD?"

When will you need the money in Canada?

Major costs in Canada when you return can be the purchase of real estate for living in or investment, a vehicle, or even money for a post-secondary education for your child. Living expenses in major cities in Canada are continually rising, so plan on having enough cash in Canada to live comfortably, too. Clearly, bringing some money to Canada is essential.

But how much?

Considerations:

If you have holdings of currencies that are strong now on a historical basis, consider moving more money now. A site that you can use to help you determine historical rates is Oanda.com, a Toronto-based foreign exchange company. Access to historical rates on their web site is free and easy to get to.
If you have holdings of currencies that you think will appreciate against the CAD, perhaps you can leave some or most of your holdings off-shore. Canadian mortgage rates are quite low right now compared to previous decades. If you feel you can at least make back your mortgage interest on upcoming valuation increases in your foreign currency, can you feel comfortable holding a mortgage while leaving your money off-shore?

For some people, this doesn't make sense and has emotional implications. For others, money is just a variable they can play with unemotionally and they feel quite happy knowing they have mixed currencies and holdings around the world.
Do you really need the money now in Canada? Money can be moved very quickly around the world. Banks like HSBC, which specialize in being "international" in nature, can move money very quickly. Perhaps you can wait some months or years, until exchange rates are favourable?
Taxes: If you are coming back to Canada and will be working, RRSP's can be a useful tool for minimizing your taxes. Bringing enough holdings to contribute to your RRSP may make strategic sense.

The USD - CAD Dilemma

I have added some USD foreign exchange considerations to the "Moving Back to Canada from USA" page, which can give you some general ideas.

The dilemma facing Canadians considering moving their USD funds to CAD is embodied in this Oanda.com chart:

Quite simply, the USD is heading downhill and has been doing so on average for 10+ years. Given the American debt crisis as of the writing of this article, there are indications of further devaluations to come.

When will it stop going down?
When will it start going up?
Do I convert now or later?

I am no fortune teller, but the "fundamentals" (basics such as U.S. debt, savings, employment rates, etc.) of the U.S. economy are so bad that it is hard to make a case for the USD getting stronger any time soon.

So, if you need the money now in Canada, and you expect some further declines in the future, exchanging now may save you from future losses from a poorer exchange rate. .

If you can wait for the very long term (5-10 years +), you may see some peaks that go significantly above where the exchange rate is right now.

The Canadian Economy - Past, Present, and Future

"Hewers of wood and drawers of water"

This used to describe the early Canadian economy. Resource-based. And we did most of our trade with the U.S. .

Today, the Canadian economy is more diversified, but we still retain some of the economic pillars of the past. What Canada looks like now:

Resources still represent a significant portion of our GNP.
Vehicle and parts manufacturing is still an important component of our economy, particularly in Ontario.
High tech and entertainment are now a significant part of the Canadian economy - software, movie/television production, and more.
Banking and financial services are strong.
Government employment represents a strong part of our GNP compared to other countries.

The challenge for the present and future? We still do 3/4 of our trade with the U.S.!

Another old saying:

"When America sneezes, Canada gets a cold".

Given our reliance on the U.S. for trade, and the fact that the U.S. population and economy is 10 times the size of Canada's, is there cause for concern when this friendly neighbour gets economically sick?

Yes.

Implications:

The simplest and most clear message coming from Canadian reliance on our distressed neighbour to the south is that you might consider holding a significant part your financial investments outside of Canada and the U.S., in foreign currencies and investments. Switzerland, the UK, Brazil, and China are all in better condition than the U.S. and by implication of or close connection to the U.S., Canada.

This is tricky stuff. If you have significant financial holdings in a foreign currency I suggest you consult with a sophisticated financial advisor who understands currencies, specifically.

Part 2: Hedging

"Hedging" simply means balancing your risk or "not putting all your eggs in one basket".

When one currency goes up another goes down, by default. Obviously you want to be invested more in currencies that go "up" over time and not down. However, this is devilishly hard to predict, per the timing issue noted above.

For most people, this means you need another tool: Owning more than once currency so that when one goes down, you have another that goes up. You don't gain...but you don't lose, either, assuming you have spread your risk across several currencies.

If you are getting paid in one currency, and putting always savings for the future, hedging is a powerful risk reduction tool for you.

Example mix, assuming you are still living overseas or are returning to Canada but do not want to immediately convert all your funds:

You have Australian dollars (AUD) 100,000. Here is how you might hedge it:

AUD 40,000 (40%)
USA 21,000 (20%)
EUR 16,000 (20%)
CDN 21,000 (20%)

(the above is just an example to illustrate hedging, not necessarily the best investment mix for you at the time of reading this)

Another example mix, if you want to be a bit more widely invested (slightly higher risk, perhaps, but with profit potential):

AUD 20,000 (20%)
EUR 16,000 (20%)
CDN 21,000 (20%)
CHF 19,500 (20%)
BRL 37,000 (20%)

Holding multiple currencies might seem complicated, but it really is quite simple. If in doubt, always hold at least 2 different major currencies, ones that are not closely tied together For example, the USD and CDN are too closely tied to be considered an effective risk management strategy. CDN and EUR are not closely tied together. Holding funds in these two currencies would be the start of an effective hedge strategy.

Part 3: Off-shore Banking

Off-shore banking might conjure up images of people hiding their funds from tax collectors in their country of residence. While off-shore banking might be used for unsavory purposes, accounts with banks that are legally structured in odd places in the world are really just great banking services for lots of normal expatriates who do not want their accounts and funds controlled by countries who have lots of bank and currency controls.

Opening an international off-shore bank relationship with a major international bank makes sense for many expatriates and Canadians returning to Canada to resume residency. You can hold multiple currencies in accounts with the bank and access your accounts and fund electronically from anywhere in the world. HSBC is an example of one such bank. On top of offering accounts with multiple currencies, HSBC will also give you an international credit card that is not linked to the country you are resident in. It comes with high fees for usage, but while traveling or between country residencies, it might make sense. (Note: This is not an ad for HSBC and I do not work for them or are paid by them in any way).

Per the hedging discussion above, off-shore banking is a great way to set up a simple hedging strategy. As international banks understand multiple currencies much better than local banks, they are in a position to make your hedged savings happen quickly and easily.

One final note on off-shore banking:

Integrity. I strongly suggest staying in your integrity at all times with off-shore banking, tax considerations, or any other question when moving back to Canada. My Godfather, a modestely wealthy man, explained it to me this way:

"I never cheat on my taxes. And I sleep well at night."

Your ideas, considerations, and experiences?

Please share with me your ideas, considerations, and experiences relating to foreign exchange. I will post them here as help for others. Along with a credit to you will be a big thank you on behalf of the many people you will be helping!

- Paul Kurucz

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