A depreciated loonie could help Canadian companies' bottom lines as we head into earning seasons here up north. Many companies with US exposure are expected to see a boost in its earnings per share projections, such as banks and energy companies. The falling dollar, now valued at 1.37 US, provides a cushion for many corporations who report in Canadian dollars but generate revenue in the US.
How so? Most Canadian companies have expenses in Canadian dollars. All things being equal, if they are now receiving 30 per cent more in Canadian without changing their business models, implementing any new strategies, or growing their brands, there is an automatic hike in revenue after conversion.
Canadian banks exposed to the US include TD and Bank of Nova Scotia. These two have entered the US years ago and may reap the benefits of a falling loonie.
Energy companies have seen oil prices crash over the last year, but the falling dollar has made times a little easier. The spot price of WTI is currently trading around $33 a barrel; this is $45 Canadian. When oil was at its peak, the Canadian dollar was near par. The drop in oil itself has significantly lowered expectations. Suncor has posted earnings today with the stock rising over 1 per cent on news it lost 2 cents per share in this quarter. Other major oil companies include Canadian Oil Sands and Imperial Oil.
Should the Bank of Canada lower interest rates?
JP Morgan mentioned just prior to the Bank of Canada interest rate decision that lowering the lending rate in Canada would indeed help the country's economy. The reduction in the interest rate to below 0.50 per cent in theory would have lowered the Canadian dollar even further, but as an exporting country, this would improve GDP.
The depreciation of the loonie could have helped kick start inflation as well. Canadian inflation rates have meandered below the 2 per cent target for an extended period of time which is often an undesirable situation. Inflation encourages spending and the flow of money as consumers that make purchases are more likely to do it sooner rather than later. If a deflationary economy exists, spending could halt and a recession could be ignited.
Disclaimer: the author of this article has household members that own Bank of Nova Scotia and Canadian Oil Sands. This article is for information purposes and does not make recommendations on buying or selling any of the companies listed. Please review your investment holdings and speak to a professional prior to any decisions.
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