USA Dollar

Why a strong April for the loonie could be a good time to increase exposure to U.S. dollar assets

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From 1990 to 2023, the Canadian dollar has increased by an average of 0.8 per cent in April.eyetoeyePIX/iStockPhoto / Getty Images

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The Canadian dollar has been declining relative to a strengthening U.S. dollar since late December, dropping from almost US$0.76 to approximately US$0.74 today. However, Canadians could be in for a reprieve as the loonie has a strong seasonal tendency to perform well in April. That means investors can take advantage of an April rally to increase their exposure to U.S. dollars in their portfolios or to U.S.-dollar assets, such as stocks.

The Canadian dollar is generally supported during the month of April with higher oil prices, which tend to boost the currency’s value. Oil prices tend to increase in April as demand for gasoline ramps up heading into the driving season, which starts on the Memorial Day long weekend in May in the U.S.

The Canadian dollar’s strong seasonal performance in April is not totally dependent on rising oil prices. April tends to be one of the stronger months of the year for the stock market over the long term, as first-quarter earnings season begins. In a risk-off environment for the stock market, the Canadian dollar can benefit from investors moving away from the U.S. dollar safe haven.

From 1990 to 2023, the Canadian dollar has increased by an average of 0.8 per cent in April and outperformed the U.S. dollar 62 per cent of the time, making it by far the strongest month of the year. To put the monthly gain in context, if the Canadian dollar were to increase 0.8 per cent every month of the year, this would be equivalent to a gain of over 10 per cent for the year.

The longer-term economic trends favour a stronger U.S. dollar versus the Canadian dollar, so the window to take advantage of any April gains for the loonie may be small. The U.S. Federal Reserve Board is expected to maintain a tighter monetary policy longer than the Bank of Canada (BoC) as inflation is proving to be a bigger problem in the U.S., where the year-over-year inflation rate for February was 3.2 per cent compared with 2.8 per cent in Canada. If the BoC were to start cutting its key interest rate before the U.S., it would put downward pressure on bond yields – particularly at the short end of the curve – and on the Canadian dollar.

The U.S. economy continues to be one of the better-performing economies in the world, and growth generally translates into higher interest rates as demand for loans increases. Higher interest rates increase demand for the U.S. dollar and increase its value. Currently, there’s no indication that the performance of the Canadian economy will improve relative to the U.S. economy.

Investors looking to take advantage of the potential rally in the Canadian dollar in April can purchase U.S. dollars or buy investments exposed to the U.S. dollar such as stocks, bonds and exchange-traded funds.

When buying assets exposed to the U.S. dollar, investors are making two investment decisions: first, on the value of the underlying asset; and second, on the change in the value of the foreign currency. For an investment exposed to the U.S. dollar (unhedged), the investment gets an extra benefit from the currency move if the U.S. dollar increases in value.

There’s no guarantee the Canadian dollar will increase this April, but there is a strong seasonal trend supporting it. Seasonal trends are not guaranteed, but they tend to increase the probability of success.

Brooke Thackray is research analyst at Horizons ETFs Management (Canada) Inc.

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