Imagine your carefully constructed investment portfolio suddenly encountering an uninvited guest—currency risk. So far in 2025, the greenback has weakened roughly 4.8% versus the loonie, while the broader dollar index has dropped close to 8.7%. What does this mean for Canadian investors? If your US dollar assets remain unhedged, you’re already facing a 5% headwind.

This isn’t a simple “salt or pepper” choice, but rather a precision calculation game involving multiple dimensions. When the Canadian dollar moves from 73 cents to 75 cents, or drops back to 70 cents, the real question isn’t about accurately predicting currency direction (which is nearly impossible), but about understanding the deeper logic behind the art of currency hedging.

For Canadian investors, the US dollar behaves like that unpredictable yet dependable companion you’ve known for years. When global economic growth is robust and market sentiment is optimistic, the TSX and Canadian dollar typically perform well. But during periods of slowing growth or mounting recession fears, Canadian equities and the loonie typically stumble while the dollar surges. Regardless of your feelings toward American policies, the greenback maintains its status as the ultimate refuge currency. During market turbulence, money consistently seeks shelter in US assets, boosting the currency’s value.

This is why the USD serves as a “ballast” in investment portfolios—even more effectively than bonds. According to five-year weekly data analysis, the USD exhibits negative correlation with the TSX, meaning they typically move in opposite directions. This negative correlation makes the USD an excellent diversification tool for Canadian portfolios, often outperforming traditional bond allocations.

Attempting to determine a “fair valuation” for currency exchange rates is like trying to predict the next Nobel Prize in Literature winner. In the short term, differences in economic activity and interest rate changes do drive exchange rate volatility. However, from a truly long-term perspective, purchasing power parity theory does play a role—the process is just extraordinarily slow. Even after the CAD’s rebound year-to-date in 2025, the Canadian dollar remains undervalued relative to the USD. But this situation has persisted for nearly a decade, just as the CAD was overvalued for the previous decade.

This currency cycle presents an intriguing pattern of “thirty years east of the river, thirty years west of the river.” The CAD performed poorly in the 1990s, the USD underperformed in the 2000s, and the CAD has again been weak from 2010-2025. This pattern suggests that if currency performance over the next 5-10 years is a coin flip, that coin would likely favor the Canadian dollar. Looking ahead, fundamental trends suggest the dollar faces headwinds, providing theoretical support for considering hedging strategies.

Historically, crude oil movements heavily influenced the loonie, though this connection has significantly diminished post-2020. Today, the differential in short-term bond yields between the two nations carries greater weight. The compression in 2-year rate spreads has bolstered the Canadian currency, amplified by energy price spikes amid escalating Middle Eastern tensions. Combined with cooling tariff uncertainty, halving of CAD short positions, and slight “anti-US” sentiment in markets, the CAD’s rebound from below 70 cents to the current 73-cent level represents a perfect storm of supportive factors.

Market participants have largely absorbed these developments, which probably explains much of the recent dollar softness and loonie strength. The key question is what happens next. If tariff policies become clearer, the CAD may strengthen further; if economic data continues to weaken, the USD may regain strength; or some unexpected factor may suddenly emerge to shake up the entire currency market.

Facing this complex multi-variable equation, wise investors need to find balance across three dimensions. Meanwhile, short-term factors are full of noise and only warrant action when exchange rates move too far or too fast.

For high-net-worth investors with substantial overseas assets, the impact of currency hedging decisions is magnified. Every 1% currency fluctuation means hundreds of thousands in gains or losses for portfolios in the tens of millions. This magnitude of impact requires investors to think carefully, considering not only the diversification benefits of core holdings, but also the timing of tactical adjustments and the strategic vision of long-term planning.

At the current critical level of 73 cents, the professional attitude should be to maintain rational ambivalence. This level isn’t high enough to excite adding USD currency hedges, but not high enough to warrant removing existing hedges either. True wisdom lies in understanding the delicate balance between various factors: diversification benefits, long-term trends, short-term volatility, and individual risk tolerance.

Currency hedging has no standard answer, which is precisely what makes it an art rather than a science. In this million-dollar currency game, the ultimate winners are often not those who try to perfectly predict markets, but those who can maintain balance amid uncertainty and find simple patterns within complexity. After all, in the investment world, the greatest risk often comes from excessive certainty, while the greatest opportunities hide within rational ambiguity.