The Art and Science of Currency Conversion

contributed by John E. Rice, CFA, CFP®

CurrencyBecause of the Canada-US cross border clients that we serve, KeatsConnelly has been working with currency exchange houses and banks on behalf of our clients for the entire twenty three years of our existence. Along the way we have made some mistakes and learned many lessons. The industry has also changed a lot during this time. We get numerous questions about currency exchange so we wanted to share some thoughts on this.

Getting Straight

The first thing you need to know about currency exchange is how to correctly read a quote. Once you know which currency is in the numerator and which is in the denominator, the rest is basic math. But because standard published rates are not always consistently reported in the same format, setting the math up correctly can often be difficult. For example, quote services often use the slash (/) to mean exactly the opposite of what you were taught in grade school. If you see USD/CAD that may mean that the USD is on the bottom, which is known as the base currency. If you are wondering which way your quote service is reporting the currency, a trick is to look at the USD/JPY quote because USD and JPY are so different in value you can always tell which way the quote works. If USD/JPY = 96.17 then you know that in this case JPY is on top and that USD is the base currency. If USD/JPY = 0.0104 then you know that JPY is the base currency. It is very easy to get turned around when doing conversions between Canadian dollars (CAD) and US Dollars (USD) because they have traded at similar values over the past few years. For the rest of this discussion I will use the common nomenclature of USD:CAD where USD is the base currency.

Hidden Costs

The second thing to know is that currency exchange is one of the big profit centers for banks. Many banks will tell you there is no cost to exchange currency with them. Some bank employees won’t understand the costs themselves and how the bank makes money from currency exchanges. In order to find the true cost of a transaction, you can ask for the price to exchange both ways, and the difference is known as the “spread” on the transaction.

For example, let’s say you approach the bank when the USD:CAD exchange rate is 1.02. If you have CAD$1,000 and want to exchange to USD and the bank will give you $970.87, then some math will tell you that you actually got an exchange rate of USD:CAD 1.03. If you then ask the bank if you can exchange USD$1,000 for CAD and are told that you can get CAD$1,010.00 for your USD$1,000, then you know you are being offered an exchange rate of USD:CAD 1.01 for this transaction. The spread here is approximately 2% and the cost to you is about 1% because the bank is converting currency as a dealer in the market at 1.02 and then adding 1% profit and passing this through to their customers.

Another place this comes up is when you have foreign assets in portfolios that have cash flows, such as bond interest payments or stock dividend payments. When these cash flows occur, typically the custodian you are working with will do the currency conversion when the cash flow is received. If you hold RBC stock in your USD brokerage account at Schwab and RBC pays a dividend, Schwab (or the custodian these transactions are handled through) will convert the currency and deposit the cash into your account. You will typically be charged at least 1% or more for this service.

Not So Fast…Moving Money!

Now that you know how to read a quote and understand the cost, you are ready to do a transaction, right? Not so fast. If you don’t already have an account at an institution you will need to open an account, make sure you can transfer money into it, and pay any wire fees in order to do so. Getting your bank to wire money out of Canada into another financial institution can be near impossible if you are not there in person to conduct the transaction. Be aware that getting money out of your bank and into another bank may not be easy and may have costs, such as wire fees. Some of this cost and hassle can be minimized if you work with a bank that has both CAD and USD accounts such as TD or RBC, but you often have to pay “full freight” on the currency exchange fees when using these large banks.

Currency Speculation

Another topic that frequently comes up when you start to deal with currency conversion is the opportunity it provides you to speculate on currency movement. When it’s time to do your conversion, you may wonder if you should hold out for a better price later in the day or next week. And you may also be told that you can put in a type of order that will only execute if the currency exchange rate gets to a specific value that is just a little higher what it is currently.

We don’t believe you will consistently improve your financial situation by trying to speculate on currencies. You may get lucky and make a little more money on the exchange, but you may also lose money by doing so. Whichever the case, don’t fool yourself into thinking that you have any special ability or skill that enables you to “win” in the currency markets. If you really want to speculate then you should consider opening an options or futures account for trading currency. When you realize that delaying your transaction for the possibility of getting a better price is really another form of financial risk, you may decide currency speculation is not for you.

KeatsConnelly has worked with currency exchange houses over the years to negotiate competitive rates and service agreements for our clients. If you are doing currency exchanges and you have not spoken to us about your options, please contact us to see if we can help.

If you are a provider or client and have a question or comment that you would like to share I encourage you to email me directly at We welcome the opportunity to discuss these matters with you.

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Posted in Cross-Border Blog
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