Vacations are many things: exciting, relaxing and even rejuvenating. But they’re not always cheap. If you’re travelling outside of Canada, there’s something to consider that can make a vacation even more expensive: currency risk.
When you’re in Canada, you can obviously get by only spending Canadian dollars. But a trip to another country requires you to have funds in that nation’s currency. What this means is that if our dollar falls against your destination country’s currency, your trip will become more expensive.
This is a reality for the countless Canadians who venture south to the United States every year. Back in 2013, the loonie traded at par with its American counterpart. Since then, it’s fallen roughly 25% to the 75-cent level. For Canadians who travel to the U.S., this has meant a substantial decline in purchasing power.
So what’s a Canadian to do?
We can’t magically bring back the days of the loonie at par. Yet we can ensure that if our dollar keeps falling against the U.S. currency, trips south of the border don’t become even more expensive.
Here’s how. When most people think about buying a GIC, they probably think in terms of Canadian dollars. After all, in our day-to-day lives, that’s the currency we use. There are other options, though.
Many banks also offer U.S. dollar GICs. These products are denominated in U.S. currency. There are two ways to open one of these GICs. If you don’t have any American currency, you can deposit Canadian dollars with the bank and it will convert the funds into U.S. dollars. Alternatively, if you already have American cash, you’d be able to forego the cost of conversion (which can be about 1% of your total investment). If the Canadian dollar continues to depreciate relative to the U.S. dollar, you’ll be protected, having already locked in a more favourable exchange rate.
Let’s take a look at an example of how this works. Say you spend one month of the year in Florida and incur US$3,000 of expenses. At the current exchange rate (US$1 = C$1.33), that works out to $4,000 Canadian.
If our dollar were to fall to the 65-cent mark by the time you head to Florida, US$3,000 would cost even more. To be precise, you’d then require $4,615.38 Canadian to cover your expenses. That’s an increase of $615.38 (Canadian) compared to the loonie being at 75 cents.
So if you purchase a U.S. dollar GIC when the Canadian dollar is at 75 cents, you’d avoid the extra cost of travelling. Without a ‘hedge’ like this, your vacation becomes more expensive the further the Canadian dollar falls.
Like Canadian GICs, U.S. dollar GICs pay interest, although the rates aren’t as high. Currently, the top U.S. dollar one-year GIC rate in Canada is 0.75%. While this isn’t astronomical, it will end up covering most of your currency conversion fees if you don’t have any U.S. dollars to start with.
A few caveats are in order. First, U.S. dollar GICs are not CDIC-insured, meaning that if a bank fails, your investment is not backed by the government. Second, if the Canadian dollar actually increases in value after you purchase the U.S. dollar GIC, you’ll be worse off than had you just taken your chances come travel time (because at that point, each Canadian dollar would buy a greater share of an American one).
Finally, if you’d rather avoid pesky conversion fees at the time of your trip, one possible strategy is to make sure that your U.S. dollar GIC matures just before your vacation starts. You’ll get U.S. dollars (plus interest) from the bank and be all set to go.
Vacations are meant to be enjoyed. If you’re planning on going south and fear our dollar might be going in the same direction, check out our best U.S. dollar GIC rates. They might end up saving you from an expensive currency surprise.