Back in late 2014, I wrote about how great it was to be holding US Dollars (USD) due to the declining Canadian dollar (CAD). At the time of that post, it cost $1.13CAD to purchase $1 USD, or a 13% premium. Due to the drastic oil decline over the past 18 months, CAD has followed the price of oil, today it costs about $1.40CAD to purchase $1USD. What does that mean in context? Well, say you want to purchase a $100k USD condominium in Florida. In November 2014, it would have cost $113k CAD (forget about foreign exchange fees for now). Assuming that the condo did not appreciate since 2014, the condo today would cost $140k CAD.
Needless to say, those that took advantage of the opportunity to buy deflated US real estate when CAD/USD was at par (2010-2013) have made a great investment! Not only has US real estate prices appreciated (for the most part), but selling a USD investment today means a 40% premium when converted to CAD. Same goes for those who loaded up on US stocks during that time. Not only are you getting capital appreciation, but your dividends are getting paid in USD.
So what happens now if you have a bunch of USD and want to convert it back to CAD? Most financial institutions charge a healthy spread for foreign currency exchange, usually in the 2.5%-5% range, which on $100k is up to $5k in fees. Discount brokerages do a bit better but still charge between 1% and 2%.
In light of this, here are some ways to reduce the cost of exchanging your USD to CAD.
1. Norbert’s Gambit
For those of you with a lot of USD in a trading account and looking to capitalize on a weaker CAD, there is a strategy called Norbert’s Gambit that you should be aware of. While this strategy is not for novices, it can basically reduce your FX spread to two trading commissions (plus buy/ask spread). In other words, very cheap.
To start, this strategy is best with RBC and BMO trading accounts. At a high level, the investor will purchase and an inter-listed stock (stock listed on both a US and Canadian exchange) like RY in USD, then immediately sell the same stock in CAD. BMO and RY trading accounts will automatically move shares from USD to CAD, so there is no delay, so less risk of the stock moving against you. Most discount brokerages will require a phone call to “journal” your shares from your USD to CAD account.
It may sound complicated, but here is a step by step on Norbert’s Gambit.
2. Interactive Brokers
This may be a the ultimate method of moving money from USD to CAD or reverse, as it is cheap, quick and easy (ish). Most discount brokers charge about 1-2% per exchange, Interactive Brokers charges: 1 basis point (0.01%) + $2.50 USD. Login to your account, place a forex trade for symbol USD.CAD, and sell the amount that you wish.
However, there are some drawbacks of using IB as your primary currency conversion tool. First, you need an account with them which costs a minimum of $120/year (USD). In addition, if you EFT the money from a USD bank account into the IB account, and withdrawn into a different account (CAD bank account), they will hold the money for 60 days. Third, the IB user interface is not beginner friendly.
I can see this option being a great solution for existing IB account holders AND if you don’t need the money within 60 days. You can read my full Interactive Broker review here.
3. Do it Online with Forex Brokers
While the two options above may not the best for someone without any trading experience, there are options out there that are truly easy and offer their services for a reasonable rate (relative to the big banks). I’m a bit hesitant to write any examples as I have never used their services, but from what I’m reading online, a couple of competitive options are Knightsbridge FX and XETrade.
How do they work? With Knightbridge (minimum $10k), you wire them your USD (approx $20 fee), they would do the exchange, and EFT CAD back to your account. From what I can see on their website, it appears that they charge a fee of approximately 0.5%-1.0% of the amount requested to be exchanged (plus wire fee).
For those of you who regularly move money from USD to CAD, what is your strategy to reduce fees?If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).