Canada’s economy continues to be in a period of weakness. But according to analysts, that weakness could become even worse, especially when compared to the United States economy.
In fact, one analyst recently stated that they expect the Canadian loonie to hit an all-time low against the U.S. greenback. Yet even as that happens, one area could actually benefit from a lower loonie, even if they’re Canadian companies.
Overall bad news
Granted, a lower Canadian loonie isn’t good news for Canada. A weaker loonie makes imports more expensive for Canadians. This can lead to higher prices for imported goods, which can contribute to inflationary pressures, reducing consumers’ purchasing power.
Furthermore, Canadians travelling abroad will find their trips more expensive due to the lower value of the Canadian dollar against other currencies. This can lead to a decrease in tourism spending and can affect industries reliant on tourism, such as hospitality and transportation.
Then there are businesses – Canadian businesses – that rely on imported raw materials or components that will face increased costs, potentially squeezing profit margins. This can lead to reduced competitiveness in international markets. What’s more, if Canada has significant foreign-denominated debt, a weaker loonie means that more Canadian dollars are needed to service the same amount of debt. This can strain government finances or private sector balance sheets.
But benefits remain for one sector
While overall there are certainly many issues with a lower loonie, there are some benefits, especially if the U.S. dollar is trading high. And that comes down to energy. Canada is a major exporter of commodities like oil and natural gas. While a weaker loonie can make Canadian exports more competitive in foreign markets, the benefits may be offset if these commodities are priced in U.S. dollars, as revenues from exports could decrease.
In the words of one analyst, should the Canadian loonie then hit all-time lows, Canadian resource companies “will print money.” There are many Canadian oil and gas stocks that continue to hold long-life reserve assets in Canada, based on local costs. Therefore, should the loonie fall to incredible lows and oil remain at ultra highs, then exporting to the U.S. will create immense profits.
Where to invest
If there’s one company that investors should therefore get in on, it’s Cenovus (TSX:CVE). Cenovus exports a significant portion of its oil and gas production. When the Canadian dollar depreciates, the revenues generated from these exports, when converted back into Canadian dollars, increase. This can boost Cenovus’ top-line revenue and improve its financial performance.
Plus, while Cenovus operates primarily in Canada, it may still have some expenses denominated in foreign currencies, such as equipment purchases or technology licenses. A weaker Canadian dollar can reduce the cost of these expenses when converted back into Canadian dollars, potentially leading to cost savings for the company.
This could also lead to foreign investment. A weaker Canadian dollar can make Canadian assets, including those in the energy sector, more attractive to foreign investors. This could potentially lead to increased investment in Cenovus stock, providing the company with additional capital for expansion or investment in new projects.
Overall, the company could see improved margins, leading to incredible profits. So with shares trading at just 11.4 times earnings, and a 2.6% dividend yield, it’s looking very attractive on the TSX today.
