Currency exposure

Currency exposure is the risk (and potential return) a portfolio carries from exchange-rate moves alone, independent of whether the underlying asset appreciates. A Canadian investor who owns US stocks has two sources of return: the USD price of the stock, and the CAD/USD rate when the gain is realized. One can offset the other.

The Canadian investor case is common: the S&P/TSX represents ~3% of global equity market cap, so any globally-diversified Canadian portfolio has substantial USD and EUR exposure by necessity. The diversification benefit of holding multiple currencies is real — the CAD is tightly coupled to commodity prices, so foreign-currency assets often outperform in a resource-price slump — but the day-to-day volatility is larger than in a single-currency portfolio.