Managing Exchange Rate Risk During a Cross-Border Move

by Apr 29, 2024Investment Planning

Moving to a new country can be an exciting opportunity filled with new experiences and unforeseen challenges. For U.S. and Canadian citizens crossing the border, one significant challenge is managing exchange rate risk, especially when all their funds are denominated in their home currency. Fortunately, there are numerous strategies available to mitigate this risk and help alleviate the stress of your move.

Exchange rate risk refers to the potential for fluctuations in the value of one currency against another. These fluctuations are driven by several factors including each country’s respective economic outlook, political landscape, inflationary environment, and interest rate movements. Given that we are in a period of rapidly evolving interest rates, the impact of this last factor has only become more pronounced. When one country raises its interest rate above another’s, investors will reallocate their capital to that currency so they can lend it at a higher rate. This increases the demand and reduces the supply of the higher-rate currency – since investors will convert more of their capital into that currency – therefore increasing its relative value and driving up the exchange rate. While this can be advantageous if your home currency increases in value prior to your move, it can also diminish your purchasing power if you find yourself on the other side of that equation.

Managing Exchange Rate Risk:

  1. Plan Out Your Needs

The first consideration will be to map out your liabilities and needs on both sides of the border then develop a plan to manage them. Understanding your financial needs in both the U.S. and Canada becomes even more important if you own real estate in either country, manage a multinational business, or have family obligations that need to be met. Making a move across the border can also expose you to several taxable concerns (such as departure tax and U.S. gift tax) so it is important to seek the advice of cross-border investment and tax professionals to help you plan your move.

  1. Strategize Your Conversions

For individuals who intend to maintain ties on both sides of the border, it is often good practice to hold separate accounts for both USD and CAD. This will enable you to meet your financial obligations in either currency without the need for an immediate conversion, particularly if the exchange rate has shifted against your favour. If you are making the move at some time in the future, holding dual accounts will also enable you to take a phased approach to currency conversion rather than transferring it all at once. This will average out the potential impact of exchange rate fluctuations and reduce the speculative nature behind choosing the optimal time to convert.

  1. Consider Hedging Your Risk

Currency-based contracts – notably futures and swaps – can reduce or eliminate your exposure to exchange rate risk and provide greater certainty that you will have the right amount of funds when you need them. A currency future is a contract between two parties where they agree to exchange currencies at a future date using a pre-defined exchange rate. These contracts allow you to lock in part of your funds at that set exchange rate and are especially useful when the timing and amounts of your liabilities are known with certainty. For larger liabilities that demand a more versatile approach, a currency swap may present an alternative option. These are more complex contracts where two parties essentially “swap” currencies at a set exchange rate to hedge their risk or meet their liabilities in the other currency, then “swap” them back at the end of the contract. While the benefits of currency swaps may not apply to most individuals crossing the border, those with substantial business interests in both countries can customize these contracts to meet their unique needs in ways that few other products can.

Navigating the complexities of exchange rate risk during a cross-border move requires a strategic and well-structured approach. At MCA Cross Border Advisors, our team of experts will help you look beyond the individual risks and provide you with a holistic financial plan tailored to your individual needs. For more information on how our team can help make your journey as seamless as possible, please do not hesitate to request a consultation.

Adam Carris

Adam Carris

Cross Border Financial Planner & Portfolio Manager

MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The content of this presentation is for information purposes only and should not be construed as investment or financial advice. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.