Rising Loonie Could Make For Ugly Q2 Canadian Earnings

The relatively calm reaction the soaring loonie has garnered from corporate Canada could mean companies have taken the appropriate steps to deal with the impact of a currency that is surging towards parity with the U.S. greenback. On the other hand, it could represent the calm before the storm.

This is view of Northern Securities analyst Elvis Picardo, who forecasts corporate earnings will take a significant hit from the strong Canadian dollar in the second quarter, when much of the loonie’s rally has occurred. The negative impact is expected to hurt the manufacturing and commodities sectors most.

“While the Canadian dollar currently appears overbought in the short term, this factor does not appear to be a deterrent to the C$-bulls,” Mr. Picardo said in a research note.

He also noted a foreign exchange hedging survey from the Bank of Canada in April 2006 where roughly half of the clients of Canada’s major banks said the rising loonie was impacting them negatively.

Rising commodity prices were cited as one way to hedge against appreciation of the Canadian dollar, while many respondents expected the loonie would peak in 2006, thus providing a reason for firms to reduce their hedging ratios.

But commodity price gains have stabilize recently and the Canadian dollar continues to break new records, which is why Mr. Picardo thinks second quarter earnings season in Canada “could well be an ugly one.”

Comments

[Ryan Wall]

Is there a way to profit from the appreciation of one's domestic currency? Better put; how would I as a Canadian profit from the appreciation of our currency? Is there a quasi hedging technique that would allow to profit from a rising loonie while investing in U.S companies? This question has been on my mind a lot lately as individually from the consumer level I don't feel any richer than I did in 2002. (Aside from the awesome runup in the Canadian market. (in C$ terms))

I ask this all with a view to the past as I can't imagine a situation in which our dollar could repeat the gains of the last three years anytime soon. I don't know if I would want it to.

2007 Jun 05 04:34 PM