The Canadian dollar has been climbing in recent weeks off the back of higher oil prices. Since the start of the year, oil has moved from roughly $30 a barrel to $40, while the cost of buying a U.S. dollar has fallen from $1.45 to just $1.29. The rally makes sense given the historical correlation between the loonie and oil prices.
If the Canadian dollar continues to strengthen, who wins?
First, oil needs to continue rebounding
Before you consider what to buy based on a strengthening loonie, you must be confident in a return to higher oil prices. With over 25% of the economy directly tied to the energy sector—and a much higher percentage being indirectly affected—oil prices will continue to be the driving force behind Canada’s currency fluctuations.
With that said, what can you expect from oil moving forward? Fortunately, there are plenty of signals indicating that higher prices are around the corner.
Right now, global oil production is about two million barrels per day above consumption. By 2017, however, the EIA expects this gap to close completely.
The last time the market was balanced, oil was at $100 a barrel. According to Thomson Reuters Corp., large energy companies are expected to see profits fall 67% this year. By 2017, however, earnings are expected to grow over 200%. Even Kuwait, a major OPEC exporter, expects the price of crude oil to rise to $50 per barrel by the end of 2016, citing “increased demand and shrinking supply.”
Looking to 2017 and beyond, it’s increasingly probable that oil prices will move higher, likely resulting in a strengthening loonie.
Food retailers should win
Grocery store operators such as Loblaw Companies Limited (TSX:L), Empire Company Limited (TSX:EMP.A), and Metro, Inc. (TSX:MRU) have faced mounting headwinds as the Canadian currency weakened.
Because Canada imports about 80% of its fresh fruits and vegetables, currency fluctuations have a major impact on grocery bills. When the loonie falls, prices for those goods soar. Last year, consumers faced big cost increases for certain items like fresh vegetables (up 13.3%) and fresh fruit (up 13.2%). For example, lettuce prices shot up 22%, apples rose almost 12%, and oranges were up about 9%.
According to the Winnipeg Free Press, a new survey by the Angus Reid Institute found “nearly six in 10 Canadians (57%) say it’s become more difficult in the past year to feed their families.” About 70% also said they were switching to cheaper brands to stretch their grocery budgets. That could result in consumers limiting their spending at major grocery store chains.
Rising oil prices should continue propping up the Canadian dollar. Because Canada imports so much of its produce, a strengthening currency should help lower food costs. A recently strengthening loonie is already providing some relief. Items such as beef, chicken, bacon, eggs, bread, celery, potatoes, and tea actually fell in price last month.
As food prices fall, consumers will likely feel more comfortable with loosening their grocery budgets, which will be a big boost for food retailers like Loblaw, Empire (operator of Sobeys), and Metro.
