The United States Federal Reserve increased the interest rate to its highest point in 22 years this month. America now has an interest rate between 5.25% and 5.5%, but the question is: does this affect Canadians? And if so, will it be good or bad?
How about both?
There can be negative and positive sides to the U.S. increasing interest rates. On the one hand, higher interest rates in the U.S. could make it more attractive for investors to put their money in Canadian assets, such as bonds and stocks. This could boost the Canadian dollar and make Canadian exports more competitive.
When interest rates rise in the U.S., it makes U.S. assets less attractive to investors. This can lead to an outflow of capital from the U.S. and into other countries, such as Canada. This inflow of capital can cause the Canadian dollar to appreciate in value.
However, The Bank of Canada (BoC) typically follows the lead of the Fed when it comes to interest rates. This means that if the Fed raises interest rates, the BoC is likely to do the same. This could lead to higher interest rates in Canada, which would make it more expensive for businesses and consumers to borrow money. Given we’ve already experienced several rate hikes, there could therefore be more to come.
Getting specific
There are positives and negatives, true, but there are areas of the market that could be more impacted than others. The U.S. is Canada’s largest trading partner, after all, so the health of the two economies is closely linked.
The close connection between the Canadian and American economies means that they tend to move in tandem. When the American economy is doing well, the Canadian economy tends to do well, and vice versa. This is because the two economies are so interconnected that changes in one economy can have a ripple effect on the other economy.
Some areas that could experience more effect from American rate hikes than others include the automotive industry, energy sector, and financial sector.
The automotive industry is a major driver of economic activity in both Canada and the United States. The two countries are closely integrated in this sector, with many Canadian and American companies operating in both countries.
The energy sector is another major driver of economic activity in both Canada and the United States. The two countries are closely integrated in this sector, with Canadian oil and gas exports being a major source of revenue for the United States.
Finally, the financial sector is also closely integrated between Canada and the United States. Many Canadian and American banks operate in both countries, and the two countries’ financial markets are closely linked.
A stock to invest in for protection
Investors who want to protect themselves from rate hikes in both Canada and the United States could certainly consider a company such as TFI International (TSX:TFII). It’s a global freight transportation and logistics company with a diversified portfolio spanning Canada and the United States.
TFI stock is a great choice as the company’s business model is relatively insensitive to changes in interest rates. TFI stock’s truckload business is a fee-based business. Therefore, the company’s revenue is not directly affected by changes in interest rates. Additionally, the company’s ocean freight business is relatively insensitive to interest rates, as the company’s customers typically sign long-term contracts with fixed pricing.
As a result, TFI International’s earnings are likely to be relatively stable. That’s even if interest rates rise in Canada and the United States. This makes the company a good investment for investors who are looking for a way to protect their portfolios from the effects of rising interest rates.
TFI stock is also a great buy right now based on fundamentals. It has a strong balance sheet with a dividend of 1.14%. It currently trades at just 14.62 times earnings, and shares are up 36% in the last year. The stock soared on great earnings, and this should continue as investors start looking for growth stocks.
All in all, TFI stock is a great option for investors looking to protect their cash during this volatile market — especially as rising interest rates continue on both sides of the border.
