The CAD and USD Price of Oil

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I recently spoke with a Canadian who was recently laid off from his work in Alberta’s oil patch. He was lamenting the recent decline in the USD price of the CAD as he was taking his vacation abroad and his costs were in USD. Apparently, his stock broker had told him that the value of the Canadian dollar was unrelated to the USD price for oil. My response was that I believed that while the stock broker may have wanted to believe that the link was non-existent, reality shows something different. Click on VisualCapitalist to see a recent chart visually demonstrating the relationship.

Broker instead of Bank for Better FX Rate

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So here is the follow-up on my implementation of “Norbert’s Gambit”. I needed about USD 5,000, and according to the rates posted on my bank’s site at that time, it would cost me CAD 7,145.

My first step was to purchase 500 units of DLR in my brokerage margin account (each unit represents USD 10). The (ask) price in CAD was 13.88, and the commission CAD 9.95, for an all-in cost of CAD 6,949.95. I immediately sold 500 units of DLR.U which is equivalent to DLR, but priced in USD. The (bid) price in USD was 9.96, and the commission USD 9.95, netting me USD 4,970.05.

The results:
USD 4,970.05 cost CAD 6,949.95, or CAD 1.3984 per USD (equivalent to USD 0.7151 per CAD). For that same CAD 6,949.95, I would have received only USD 4,863.58 at the bank FX rate at that time of USD 0.6998 per CAD (equivalent to CAD 1.4290 per USD). The savings: USD 106.47. The effective commission: USD 29.95 or 0.6% – a fraction of bank’s effective commission of 2.14%.

Here are the calculations:
FX Calculations

Exchanging CAD for USD less expensively

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I need US dollars for an investment in a USD-denominated stock, but I am unwilling to pay what I perceive to be the extravagant commissions banks are charging. The Canadian dollar is currently trading at about 0.72 in US dollar terms. I plan to use what has been referred to as “Norbert’s Gambit” to reduce my foreign exchange purchasing costs. The gambit has been explored on various sites, but I plan to implement the version described by PWL Capital Ltd, as I am a customer of RBC Direct Investing, and that version sets out almost exactly what I propose to do.

Here are my steps, assuming I need about USD 10,000 to make my investment, costing me about CAD 13, 800 at current exchange rates:

  1. Transfer CAD 13,800 from my RBC CAD chequing account to my Direct Investing Account.
  2. Buy 100 DLR ETF units at the ask price of CAD 13.79 each and pay commission of CAD 9.95.
  3. Sell 100 DLR.U ETF units at the bid price of USD 9.96 each and pay commission of USD 9.95. (DLR and DLR.U are equivalent units, except the former is priced in CAD, while the latter is priced in USD).
  4. Purchase the stock denominated in USD with the USD 9,967 now in my Direct Investing Account.

I calculate that my effective cost will be CAD 1.3845 per USD. This compares with the CAD 1.4201 per USD the bank would charge me at one one its branches. At the bank’s exchange rate, I would only be able to obtain USD 9,718. Using the gambit I will be able to obtain USD 9,967 – a savings of about USD 250.

I’ll update this post with the results as soon as I have them.

Welcome!

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Welcome to our site of academic musings on investments. We are a group of academics who share in interest in investing. So, we are gainfully employed by our respective academic institutions, and not professional wealth managers. That may be a strength or a weakness, depending on your perspective.

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