Buy a US stock from Canada and you've actually made two investments, whether you meant to or not. The first is the stock. The second is the US dollar itself, because your shares are priced, and will eventually be sold, in a currency that isn't the one you buy groceries with.
Your true return in Canadian dollars is roughly the stock's return plus the currency's move. If your US stock rises 10% while the US dollar falls 10% against the Canadian dollar, you've made close to nothing. If the stock falls 5% but the US dollar strengthens 8%, you're up despite owning a loser.
This isn't a Canadian quirk — an American buying European stocks, or an Australian buying Japanese ones, faces the same double exposure. But it looms especially large for Canadians, who hold a lot of US assets, and the exchange rate has swung hard over the decades: the Canadian dollar bought about 62 US cents in 2002, more than a US dollar in 2007, and under 75 cents in the years since.
An exchange rate is just a price: how much of one currency buys one unit of another. Rates are quoted in pairs, and the order matters. USD/CAD at 1.40 means one US dollar costs 1.40 Canadian dollars. Flip it and you get about 0.71 — one Canadian dollar buys about 71 US cents. Same fact, two framings, and mixing them up is the most common FX confusion there is.
Vocabulary worth locking in: a currency strengthens, or appreciates, when it buys more of the other, and weakens, or depreciates, when it buys less. If USD/CAD moves from 1.40 to 1.30, the US dollar weakened and the Canadian dollar — nicknamed the loonie, after the bird on the one-dollar coin — strengthened.
For a Canadian holding US assets, the rule of thumb follows directly: a stronger US dollar adds to your returns in Canadian-dollar terms, and a stronger loonie subtracts from them. Keep that direction straight and everything else in this chapter is arithmetic.
Let's make it concrete. You convert Canadian dollars and buy US$1,000 of a US stock when USD/CAD is 1.40. Cost: C$1,400.
A year later, the stock has risen 10%, so your position is worth US$1,100. Now the currency decides your fate.
Scenario one: the loonie has strengthened, and USD/CAD is 1.25. Your US$1,100 converts to C$1,375. Despite a 10% gain on the stock, you're down C$25 — about 1.8% — in the money you actually spend. Scenario two: the loonie has weakened to 1.50. Your US$1,100 converts to C$1,650, a gain of nearly 18% on a 10% stock move.
Same company, same stock-picking skill, wildly different outcomes. Run it in reverse for an American buying Canadian stocks and the mirror image holds. Currency swings of that size within a year are uncommon but far from rare — the USD/CAD rate has moved more than 10% in a calendar year several times in recent decades.
You can opt out of the currency ride. Many funds and ETFs come in currency-hedged versions, which use contracts called forwards to offset FX moves, so a Canadian investor gets roughly the US stock return in Canadian dollars, whatever the loonie does. The unhedged version gives you both streams, as in our example.
Neither is free of trade-offs. Hedging costs a little — transaction costs, plus a gap that opens when US and Canadian short-term interest rates differ — and hedged funds tend to lag their target slightly in messy markets. Unhedged investing costs nothing extra but adds a source of swings you didn't choose.
Two honest observations from history. Over multi-decade periods, currency effects between stable developed countries have often roughly washed out, which is why many long-term investors don't hedge stock holdings. And the US dollar has often strengthened during global panics, meaning unhedged US holdings actually cushioned Canadian portfolios in 2008 and 2020. Neither pattern is guaranteed to repeat.
Currencies respond to a familiar cast: interest rate differences (money drifts toward currencies paying higher rates), inflation, trade flows, and fear (the US dollar, as the world's reserve currency, often rallies when investors are scared). The loonie has its own particular driver — oil. Canada is a major exporter, and the currency has loosely tracked oil prices; the 2014-2016 oil collapse coincided with the loonie sliding from about 94 US cents to under 69.
Knowing the drivers, though, is very different from forecasting. Currency prediction has humbled professionals for decades — large banks publish year-ahead FX forecasts that routinely miss by wide margins, and academic research has long found short-term exchange rates barely more predictable than a coin flip. If your plan requires knowing where the loonie goes next, it isn't a plan.
The practical stance for a stock investor: treat currency as a risk to size and manage, not as an opportunity to outsmart.
A few habits capture most of the value here.
Know your exposure. Add up what fraction of your portfolio lives in foreign currencies. Many Canadians are surprised to find it's half or more once US index funds are counted.
Match currency to spending. Money destined for US expenses — a snowbird winter, US tuition — can happily stay in US dollars. Money for retirement in Canada carries genuine FX risk that deserves a decision: hedge it, accept it, or split the difference. Splitting, say half hedged and half not, is a common and defensible middle path.
Watch conversion costs. Brokerages charge a spread — often 1% to 2% each way — to convert currency, which can quietly exceed a year of fund fees. Cheaper conversion methods exist, and the cost is worth checking before it's worth paying.
And when you compare your returns to a benchmark, compare in the same currency. Plenty of stories about beating the index turn out to be an exchange-rate move wearing a costume.
Previous: Credit Markets: What Bond Spreads Are Telling You · Next: Interest Rates: The Gravity of Asset Prices · Financial glossary
← Back to all investing concepts