Why Invest in Foreign Currency GICs?

For the most part, guaranteed investment certificates (GICs) sold in Canada are denominated in Canadian dollars. This means that at the end of the term, you receive your money in the currency of this country. However, you’re not limited to Canadian dollar GICs. Many banks and financial institutions also offer GICs and similar products in foreign currencies, such as U.S. dollars and Euros.

There are a few reasons to consider buying a foreign currency GIC.

For one thing, you might earn some money in U.S. dollars. If you switch the money into Canadian dollars every time you’re paid, you’ll be subjected to foreign currency conversion fees. These will amount to roughly 1.00-1.50% every time you make a transaction. Instead, you can just keep the money in U.S. dollars and buy a U.S. dollar GIC which will at least earn some interest.

Another reason to consider buying a foreign currency GIC is if you know you’ll be travelling somewhere in the future and want to lock in the exchange rate now. Say you’re planning on going to Europe in 6 months. Buying a Euro term deposit (basically equivalent to a GIC) that matures just before your trip means that you’ll have the Euros you need, plus some interest, for when you venture overseas. On top of the interest, there’s no need to worry about exchange rate fluctuations as your trip draws nearer.

Even if you don’t earn money in a foreign currency or have a trip planned, you may still want to consider buying a foreign currency GIC or term deposit. Why? Everyone’s heard about the merits of diversification when it comes to investments (i.e. “Don’t put all your eggs in one basket”). A similar approach can be applied to currencies.

Let’s say you have all your liquid assets in Canadian dollar-denominated investments, and then the Loonie falls against other major currencies. You might be affected in two ways: first, should you go on a trip to another country, or just buy something online, say in U.S. dollars, you won’t be able to buy as much as you did previously. In other words, your purchasing power will have declined along with the slumping Canadian dollar. And if our currency falls a lot, Canada’s imports of goods will be pricier. This can feed through into higher costs for things like retail products.

This is where a U.S. dollar or other foreign currency GIC can play a role in your portfolio. Let’s say you’re worried about the potential for the Canadian dollar to decline in the next few years against its U.S. counterpart (currencies always trade relative to one another). So you put $5,000 in a U.S. dollar GIC. With the Canadian dollar at ~US$0.83 right now, this equates to $4,150 in U.S. dollars.

If the Canadian dollar does end up declining against the American currency (and it may not), the investment will be profitable. For example, if the Loonie falls to $0.70 in a couple years, the initial $5,000 will now be worth $5,928.57 (Canadian). This ignores any interest you receive, which for foreign currency GICs does tend to be pretty minimal anyway.

A few words of caution about these products, though: first, we’re not predicting the Canadian dollar will fall, although it could happen. Second, while some currency diversification is a good idea, there’s no need to completely abandon the Canadian dollar. Third, foreign currency GICs are not eligible for registered accounts and they’re not covered by deposit insurance.

All this said, if you travel a lot, or just want to spread your currency exposure around a bit, a U.S. dollar or foreign currency GIC may be something to think about.