U.S. and Other Foreign Currency GICs

Most guaranteed investment certificates (GICs) in Canada are, not surprisingly, denominated in Canadian dollars. However, some financial institutions also offer GICs in U.S. dollars and even other foreign currencies. Here’s a quick look at why you might consider buying one of these GIC products.

Why invest in foreign currency GICs?

A foreign currency GIC gives you access to the currency of its associated country, should you need it in the future, and earns interest while it’s invested. For example, if you’re planning a trip outside of Canada in six months or a year, and you think the Canadian dollar might fall before you leave, investing in a foreign currency GIC can be a great way to “buy” the foreign currency now and take it out before you leave.

But foreign currency GICs are not just a great option for travellers. Most investors follow both the Canadian and U.S. dollars. If you suspect the loonie will significantly decline in the coming months or year, investing in a U.S. GIC would allow you to profit from the drop. So adding a foreign currency GIC to your investment portfolio allows you to diversify your money and preserve your purchasing power.

Which currencies are offered?

The most common foreign currency GICs in Canada are U.S. dollar-denominated. This is because the U.S. dollar is the world’s reserve currency (held by other countries as a store of value) and it is, of course, our neighbour and largest trading partner.

In addition, some banks offer GICs or similar term deposits in other major currencies, like the Euro, British Pound and Japanese Yen.

Drawbacks of foreign currency GICs:

• Foreign currency GICs are not covered by CDIC insurance. In the event that your financial institution failed, there is no guarantee you would get your money back.
• The interest rates on foreign currency GICs can be minimal, compared to Canadian GICs.
• Like any foreign currency transaction with a bank, they buy slightly below the market rate and sell slightly above the market rate (this is known as the bank’s “spread” and it’s how they make money). So, actively buying and selling foreign currency GICs is a way to make the bank rich and you poor. For major currencies, a spread of 1.00%-1.50% is common.
• U.S. GICs and term deposits are not offered within registered accounts.

Example: The falling Canadian dollar

Beth lives in Toronto and is planning an extended visit with her grandmother in North Carolina, sometime in the next year. The loonie has been performing well but there’s talks it may go down, so she decides to purchase a $10,000 1-year U.S. dollar cashable GIC. It pays 0.20% annual interest if cashed after 30 days (with interest calculated up until it’s redeemed). At the time Beth buys the GIC, the bank gives her an exchange rate of $0.90 (each Canadian dollar becomes $0.90 of a U.S. dollar), which means her investment in U.S dollars amounts to:

She holds the GIC for a full year, before she redeems it. Because Beth left the money in her account for over 30 days, she will receive the 0.20% interest:

And the total amount of cash in U.S. dollars she will have for her trip is $9,018:

If Beth had, instead, waited until a week before the trip to simply exchange her Canadian dollars into U.S. dollars, she could’ve found that the exchange rate had fallen to $0.80. In that case, she would’ve only received $8,000 U.S. and no interest.

As you can see, the vast difference in the gain is not because of the interest on her GIC; it was the significant drop in the Canadian dollar. By purchasing a U.S. GIC ahead of time, she was able to take $1,018 U.S. more with her on her trip to North Carolina.

Drawbacks of foreign currency GICs:

• Foreign currency GICs are not covered by CDIC insurance. In the event that your financial institution failed, there is no guarantee you would get your money back.
• The interest rates on foreign currency GICs can be minimal, compared to Canadian GICs.
• Like any foreign currency transaction with a bank, they buy slightly below the market rate and sell slightly above the market rate (this is known as the bank’s “spread” and it’s how they make money). So, actively buying and selling foreign currency GICs is a way to make the bank rich and you poor. For major currencies, a spread of 1.00%-1.50% is common.
• U.S. GICs and term deposits are not offered within registered accounts.

Example: The falling Canadian dollar

Beth lives in Toronto and is planning an extended visit with her grandmother in North Carolina, sometime in the next year. The loonie has been performing well but there’s talks it may go down, so she decides to purchase a $10,000 1-year U.S. dollar cashable GIC. It pays 0.20% annual interest if cashed after 30 days (with interest calculated up until it’s redeemed). At the time Beth buys the GIC, the bank gives her an exchange rate of $0.90 (each Canadian dollar becomes $0.90 of a U.S. dollar), which means her investment in U.S dollars amounts to:

She holds the GIC for a full year, before she redeems it. Because Beth left the money in her account for over 30 days, she will receive the 0.20% interest:

And the total amount of cash in U.S. dollars she will have for her trip is $9,018:

If Beth had, instead, waited until a week before the trip to simply exchange her Canadian dollars into U.S. dollars, she could’ve found that the exchange rate had fallen to $0.80. In that case, she would’ve only received $8,000 U.S. and no interest.

As you can see, the vast difference in the gain is not because of the interest on her GIC; it was the significant drop in the Canadian dollar. By purchasing a U.S. GIC ahead of time, she was able to take $1,018 U.S. more with her on her trip to North Carolina.