Canadian pension plan sponsors are facing a risky landscape in 2025 regarding currency fluctuation between the Canadian and U.S. dollar.
Asset owners with access to U.S. investments typically buy assets unhedged during risk-off periods, with the expectation that the U.S. dollar would appreciate and provide a natural offset, says Etienne Bordeleau, vice-president and portfolio manager at Ninepoint Partners.
Read: Institutional investors turning to diversified portfolios to manage tariff volatility: expert
However, this strategy hasn’t worked following April 2, 2025, also dubbed by U.S. President Donald Trump as ‘Liberation Day,’ in which he officialized broad tariff policy.
“During risk-off markets, interest rates in the U.S. would be going up and the dollar down, which was very unusual. Typically, we don’t see that happening and risk assets generally were going down post Liberation Day and the U.S. dollar was going down as well.”
As part of the most recent financial reporting season, both the Canada Pension Plan Investment Board and the Caisse de dépôt et placement du Québec recognized drawbacks to their returns from U.S. dollar depreciation amid tariff-related uncertainty.
“In the first half of the year, the portfolio’s exposure to foreign currencies adversely impacted overall performance, mainly due to the sharp depreciation of the U.S. dollar,” the Caisse said, noting it conducted partial hedging to offset negative impact from its bottom line.
The CPPIB said foreign exchange fluctuations may impact returns in the short term but maintaining a well-diversified global currency composition will help mitigate overall return volatility over longer time horizons.
A recent report by Invesco said the U.S. dollar has weakened faster than what was expected and despite some short-term consolidation, it may see continued weakness heading into 2026.
In its second quarter pension index report, Normandin Beaudry noted the interest rate gap between Canada and the U.S., which contributed to relatively high costs for hedging against fluctuations in the U.S. dollar relative to the Canadian dollar.
“What’s happening in the U.S. [is] fundamentally reshaping the role of the dollar globally and we should expect rallies to be sold and the trend to be for lower dollar, [leading to] long-term or medium-term impacts on unhedged asset returns in the U.S.,” says Bordeleau.
Read: Why Canadian pension funds should care about a slumping U.S. dollar