How to Get the Best Rate on USD to CAD?

 

Canadians exchange billions of dollars of USD to CAD every day.  These transactions range from the very small to the very large and serve every purpose imaginable.  The economies of Canada and the US are highly integrated but we have different currencies so no wonder the volume and need for such transactions is so high.  Whether you are paying an American supplier, or receiving payment from American clients, or making large investments in the US, or just picking up some cash for a weekend south of the border, you are part of the USD to CAD market. 

 

Converting USD to CAD (or vice versa) is very common for Canadian individuals and businesses.  These transactions all have one thing in common; the exchange rate on the USD to CAD conversion matters a lot because it determines how much Canadian dollars you will receive for your US dollars.

 

Exchange rates are determined by a myriad of factors and are always moving.  You can not do anything about the overall exchange rate when you decide to do a conversion.  That rate is set by the markets and takes into account a whole array of economic factors.  But what you can do is try to get the best exchange rate relative to the market rate at any given time.

 

Let me explain.  The market exchange rate (sometimes called the “spot rate”) is not available to anyone but central banks.  It is a little bit like prime interest rates set by the Bank of Canada.  It becomes a benchmark that others use but no one can borrow at that interest rate.  The same thing applies for spot exchange rates.  They are a reference point.  The best a business or individual can do is to try to get the rate that is closest to the spot rate at any given time.

 

Let’s say you go to you log into your bank account at any Canadian bank and look to sell 10,000 US dollars to Canadian dollars.  And let’s say the spot exchange rate at that point is 1.275.  In theory, you should receive 12,750 Canadian dollars for your US dollars.  But that is not the rate at which the bank will let you exchange your US dollars.  Instead, the bank might offer you a rate of 1.245.  At that rate, you will receive 12,450 Canadian dollars in exchange for your US dollars.  That means that the bank has given your $300 less for the exchange relative to the spot exchange rate.  In effect, the bank has charged you $300 or 3% for the conversion.

It is pretty amazing when you think about it.  You went to convert your own money from one currency to another and the bank has just charged you $300 to for it.  They haven’t actually done anything else.  They haven’t lent you money or provided any actual service.  We would all be upset if we went to the bank and said we wanted to take our Canadian dollars from one account to another and they charged us 3% to do that.  But for some reason, most people do not pay attention to it when it involves an exchange from USD to CAD.

So, what can you do about it?  Well, as usual, innovation and technology come to the rescue.  A crop of new emerging companies called “fintechs” (short for financial technology) companies are allowing Canadians to access all kinds of banking services at much better rates.  In the foreign exchange market, companies like Interchange Financial allow Canadians to access much better exchange rates by combining technology with financial knowhow.  These services allow you to logon in minutes, link your USD and CAD bank accounts and the convert at exchange rates that are substantially closer to spot rates. 

In that earlier example, these services might save you $200 on the USD to CAD conversion.  A saving of 2% seems small at first glance but is actually quite significant when you think about the fact that most Canadians are borrowing money for around those levels on an annual basis.  That is, we will pay 2% or 3% a year for a mortgage but often we do not pay attention to a 2% savings for a single transaction.  Also, it adds up.  If you are converting USD to CAD on a periodic basis, that 2% saving on each transaction will add up to even more on an ongoing basis.

In conclusion, USD to CAD exchange are very common in Canada and they can be a source of significant savings if you are using the right service provider.  If you are working with the right company, you can get a much better exchange rate on USD to CAD than banks and other traditional service providers.  In the end, what that means for you is that you get more for your money in exchange for your money.