By Gail El Baroudi
Special to The Globe And Mail
Thursday, October 30, 2003

The minute the Christmas decorations and New Year's party hats are stored away, Jim and Eleanor Hamilton will be heading south to Brownsville, Tex., a scenic, mid-sized city on the Rio Grande River, where they've been wintering for the past 10 years.

The couple's annual, three-month stay promises to be especially pleasant this year, thanks to the sudden and surprising strength of their own Canadian dollar.

As seasoned snowbirds, the Hamiltons, both 72, have witnessed the swooping and soaring of their currency over the past decade.

"In 1993, we paid about $1.25 or $1.30 to buy a U.S. dollar, but in the late nineties, we really noticed a big difference -- it was astonishing. A dollar cost $1.50 or even $1.55," says Mr. Hamilton, who worked in the drapery business in Hamilton, Ont., before retiring 12 years ago.

The high price of the U.S. dollar had a big impact on their daily lives, prompting them to cut back on dining out and shopping for clothes and gifts, say the Hamiltons, who've known each other for almost 50 years but married just 13 years ago, after both were widowed.

With the Canadian dollar hovering around 76 cents (U.S.), the 60-foot mobile home that they rent for $700 a month will cost them about $925 a month in Canadian dollars this winter. That's down from the $1,075 they paid last year, when the loonie was trading around 65 cents. They'll enjoy similar savings on all their basic living expenses.

"We're certainly looking forward to having more disposable income this winter," Mr. Hamilton says. "We're planning to spend 10 days in Mexico . . . which we can afford to do now and we're looking forward to shopping and going out more and to having our children and grandchildren visit us."

But if the soaring loonie is making snowbirds happy, it's a real concern for others.

Warren Baldwin, in Toronto, says the higher dollar makes those who work in exporting industries very vulnerable.

For those worried that their jobs might be affected, "I'd say, polish up your parachute, update your résumé, start networking and have at least three to six months of living expenses on hand. A lot depends on what kind of severance you can expect and whether you're a one- or two-income family."

The big question, of course, for those with U.S. investments or other financial connections down south, is where the dollar is headed.

Adrian Mastracci, president of Vancouver-based KCM Wealth Management, says he expects the dollar to trade in the 72- to 78-cent range for the foreseeable future. "Nobody knows, but that's a reasonable expectation," he says.

Dan Hallett, in Windsor, Ont., says that, at around 75 cents, the loonie is probably close to where it should be, based on economic fundamentals.

"Personally, if I were travelling or investing in the U.S., I'd have no hesitation in converting my currency at these levels," he says.

"We could see it move a little higher, but I don't think there's much danger of it falling back into the mid-sixties."

Investors who haven't yet moved into U.S. stocks may want to do so now, Mr. Mastracci says. "Investing in the U.S. economy ought to be part of everyone's game plan and today the Canadian dollar buys a lot more in that market than it did a year ago."

He recommends a "basket approach," that is, investing in one of the many exchange-traded funds or index funds that mirror the movements of the Standard & Poor's 500 composite index.

"This gives you very low management fees and instant diversification," he says.

Mr. Baldwin advises clients with mortgages on sun-belt condominiums or any other U.S. dollar-denominated debts to pay them off now if possible, to take advantage of the stronger Canadian dollar. And he says that investors in the U.S. market should hold the fort.

"It would be crazy to think of moving out of the U.S. market. It has done well and most of the exchange-rate losses are probably behind us," he says.

But some investors, having taken a hit from the sudden rise in the Canadian currency against the U.S. dollar, do wonder if it's time to dump their dollar-denominated investments, including their U.S. mutual funds.

"I wouldn't recommend that," says Gordon Pape, author of a best- selling mutual fund guide book.

Admittedly, the exchange-rate losses of U.S. mutual funds have wiped out most of their investment gains this year, as U.S.-dollar returns were converted back into Canadian currency, Mr. Pape says.

"One example is the AGF American Growth Class Fund. The U.S.-dollar version posted a 19.04 per cent gain for the year ended Sept. 30, but the Canadian-dollar version of the fund gained only 1.49 per cent over that same period -- we see this pattern repeating itself for every U.S. fund."

Still, "U.S. funds have had their worst losses and it's highly unlikely that over the next 10 months we will see the same percentage losses that we've had over the last 10 months," Mr. Pape says. "At the 76-cent level, the Canadian dollar has risen about 20 per cent against the U.S. currency. If it were to rise by another 20 per cent, it would be trading at more than 91 cents to the U.S. dollar, a scenario that seems unrealistic at this time."

And even if it were to hit 80 cents, as some predict, that would represent a further increase of only about 5 per cent, he notes.

Investors who want to buy into U.S. stocks while avoiding any future exchange rate losses could consider some U.S. equity funds that are hedged against currency losses, Mr. Hallett suggests.

For example, the RBC O'Shaughnessy funds, both growth and value, are completely hedged, while giving full exposure to the U.S. market.

For those who want to increase their exposure to currencies outside North America, Mr. Pape suggests moving into a foreign bond fund with a manager who has established a good, long- term record.

An example would be the AIC Global Bond Fund, which has posted average annual returns of 9.5 per cent in the three years ended Sept. 30.

"Don't try to be an expert in foreign currency investing," he warns.

"Let an experienced manager do it for you."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.