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The Canadian Dollar Retreats: Canadian Railway Stocks Benefit

On August 2, the Canadian dollar dropped to a two-week low and fell below the $0.80 mark. The dollar has seen a $0.10 increase since early May. Tailwinds included the continuing slump of the U.S. dollar against international currencies and the decision by the Bank of Canada to hike the base right 25 basis points for the first time in almost a decade.

Jobs numbers in both the United States and Canada were released on August 4. The positive jobs report, after strong GDP numbers reported July 28, could all but guarantee a further rate move by the Bank of Canada due in October. In the U.S. the Federal Reserve has also promised to raise rates, albeit gradually, and the jobs report should bring another move in the fall.

Canadian rail stocks have benefited from the Canadian dollar’s retreat

The share price of Canadian National Railway Company (TSX:CNR)(NYSE:CNI) has increased 2% amid the dollar showing renewed weakness. It closed at $100.98 on August 2 — up 1.2%. The company posted a 20% rise in profit in its second-quarter earnings report at $1 billion. Revenue was posted at $3.3 billion — up 17%.

During its second-quarter conference call, chief executive officer Luc Jobin warned about the potential obstacles faced for manufacturers by the rising Canadian dollar. “The North American economic outlook continues to be positive,” he said. “… However, volume comparisons in the second half of the year will be more challenging, and the strengthening of the Canadian dollar will be a constant headwind.”

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) stock was up 1.05% on August 2 and closed at $197.99. The share price has fallen 7% since early May. The company suffered losses even after a positive earnings report on July 19. It posted revenues of $1.64 billion, representing growth of 13% from Q2 2016. Net income was reported at $480 million — up 46%. In spite of this news, the stock price fell below the $200 mark the next week for the first time since early April.

The Canadian dollar is now trading below its 20-year average of $0.82 to the U.S. dollar. A recent Bloomberg report seemed to indicate some concern in Ottawa regarding the timing of the Bank of Canada rate hike. If oil continues to retreat from its current rally, there could be enough headwinds to keep the dollar below the $0.82 mark.

If that is the case, it will alleviate concerns for both CP Rail and Canadian National Railway. CP Rail boasts a dividend of $0.56 per share with a dividend yield of 1.14%. CNR has a dividend of $0.41 and a yield of 1.63%. The Canadian dollar should take a breather for the remainder of 2017, giving investors two stocks that present buy-low opportunities and provide income for their portfolios.

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Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

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