My salary is set in US dollars but paid out in Canadian dollars with the exchange rate updated once a quarter to whatever the market rate is at that point in time.

I know almost nothing about investing/financial instruments, but is there something I can do/buy to reduce the impact of drops in the exchange rate?

I don't particularly care about smallish/short term drops/variance in the 5-10% range, but care more about longer term and more significant changes.

If you're getting the rate updated every quarter, is longer term really a concern? I'd think if it moves significantly going forwards, your biggest risk is your employer finding someone closer to home who is cheaper.

As an alternative perhaps it would be wiser to re-negotiate the rate update period to monthly. You can cite the tumultuous market conditions as a reason you'd like to do this.

In answer to your question, you'd have to short the currency pair. This will lock up quite a lot of cash (unless you take leverage which means you're going to have to keep an eye on it and possibly add more cash to it if you're getting close to a margin call) and it will cost you interest (although at the moment it's cheap). Quite a bit of room there to make some costly errors.

Also, as a side note when the exchange rates get cheap for the employer, that would be a brilliant time to renegotiate your rates if there's scope for that. You might ask for a 5% rise, and the employer will look at the balance sheets and see that you're 10% cheaper currently then they are used to paying.

FXC.

Gull, my employer is in the US and I'm in Canada. So the way the HR/Employment stuff works is that there's a 3rd party HR company that handles all of the legal employment crap.

My employer and I have an agreed USD salary that doesn't change. Once a quarter that salary is converted to a Canadian dollar amount using the current exchange rate. For the rest of the quarter I'm paid bi-monthly based on my converted Canadian salary. The HR company charges my employer the daily exchange rate each time I'm paid.

So my employer's exposure to the exchange rate is pretty limited. They're basically just exposed to the short term variance of the daily exchange rate used each pay period compared to the exchange rate that was used for that quarter.

My long-term exposure is significantly higher as my USD salary won't change but the amount I'm getting in my domestic currency may change significantly.

Edit: I should also add that I have very little room to negotiate changes to the general process of how I'm paid. Its driven by a number of things that make sense and without a really good reason I'm not going to try to change it.

So I'd convert CAD to USD to buy FXC? Isn't that equivalent to holding Canadian Cash?

Yep!

That's not really what I want. I'm looking for something that would increase in Canadian dollar terms when the Canadian dollar gets stronger.

For example, since the Canadian dollar is highly correlated to the price of oil, could I buy shares of Canadian oil companies assuming that if my effective salary goes down due to the increase in value of the Canadian dollar that would be offset by the increase in value of my Canadian oil companies.

Of course not. You would be effectively using CAD to purchase CAD, silly!

Your exposure seems to be your savings. Your salary in CAD and expenses are somewhat matched (rate setting mismatch aside). If you don't plan on spending 20 percent of your pay convert that to USD assets quarterly.

Converting to USD assets seems like the opposite of what I want since I live (and plan on continuing to live) in Canada and the situation that is bad for me is when the Canadian dollar ends up stronger relative to the US dollar.

I guess my question is roughly this. Let's say I'm currently getting paid $100 CAD. I could set my spending/savings at say $95 CAD. Is there something I can do with the other $5 CAD that would do well (in Canadian dollar terms) in circumstances where the Canadian dollar is doing well?

So if the Canadian dollar drops further against the US dollar I might start making $110 CAD. In that case I'd put the extra money towards my 'hedging' and still continue with my budget of $95.

And if the Canadian dollar gets significantly stronger and my salary drops to $90 CAD I'd be able to convert the money I'd set aside for hedging to supplement my salary and continue with my $95 CAD budget (at least for some amount of time).

So, obviously one way to do this is to just have a savings account of Canadian dollars that I add to when my salary is > $95 and I take from when my salary is < $95. But I was thinking there's probably better ways to do that (with some added risk) by putting my money towards assets that will significantly increase in value in the same cases where the Canadian dollar increases against the US dollar.

oops I thought you were a US citizen working in Canada. Do you have any CAD liabilities (debt) that you can convert to USD? That would hedge your USD long position.

No worries. It was kind of a crappy OP in terms of making the important information clear.

Maybe a USD mortgage would help reduce your exposure. I don't think traditional financial instruments help what I am starting to see as a long USD/short CAD economic exposure.

You are seeing it correctly.

JJ should just be enjoying the fairly massive local currency raise he is getting and putting the extra dough away for a rainy day.

seattlelou, I guess that is the right way to frame the problem.

There's really nothing better than just saving money (which is in fact my current strategy)? I figured there were a bunch of things that correlated well with the strength of the Canadian dollar that would be worth investing in.

Yeah when I first read this, I thought "you're worried about protecting the substantial raise you just got?". Truth is this has been a big boom for you.

Btw it's going to come down to way more than just oil for Canada. We're in trouble up here now comparatively to the states. We coasted through 2008-2009 relatively speaking, and our housing prices have gone through the roof. Most of the financial world is calling for a pretty severe correction. We're in such a different economic reality up here that it's not even obvious for the BOC to follow the FED's lead when they raise rates. We're still talking rate CUTS up here. When the FED raises rates, the Loonie is going to lose even more ground.

Honestly I don't think you've got much to worry about for years now. You just made 20% more money in the last year, and I doubt you'll give more than 5% back. You're laughing.

Ok, thanks guys. Sounds like you guys all agree.

And yeah, it's been pretty nice.

No, OP was very clear, people just didn't read it that well. Here is what I wrote when you made the OP but didn't post:

So you want to lock in the recent runup? I mean you can, but going by history/the general strengthening of the US dollar as QE ends and rates (eventually) go up, it would be a bad idea I would think. There's also talk of QE in Canada from a weak economy/oil issues, and a recent shock rate cut from the Canadian central bank in January that has caused this recent run. I think you let it ride and enjoy the extra cash? You're probably on the right side of the trade while doing nothing. Could easily go up to 1.6 and I can't see it dropping much below 1.2 long term.

I think the doubt heavily favors you and you're better off doing nothing.

Your wage is what you are getting in Canadian dollars. You can search currency hedges, and you can do normal currency hedges. But in the long run you will lose out due to the fees to run the hedge. You could use the extra money to buy any investment (gold, land, us stocks, canadian stocks) then cash in the investment if the currency goes the other way.

Many times you hear on t.v., almost daily, that to weaken your currency is good for the people and economy. I even heard Lou Dobbs say it a couple days ago.

When your currency rises, even in the United States, if you have a wage in dollars you got a pay raise. To compensate, your employee should give you a smaller raise or a pay cut next year, to compete with overseas companies paying lower wages.

However, for money already earned in dollars, you just became richer.