The Canadian dollar has been under quite a bit of pressure in recent years. And things could get a whole lot worse for the loonie (at least compared to the U.S. dollar) before things get any better. Indeed, higher oil prices may not be enough to move the needle markedly above the US$0.74 mark any longer. Today, the loonie is hovering around US$0.73, and though some lows may be in sight, I wouldn’t look to play a reversal anytime soon.
At the end of the day, the U.S. dollar is incredibly robust, and the loonie faces headwinds that could easily mount further over the coming quarters, especially as the pace of rate cuts on this side of the border is faster than the ones the U.S. Federal Reserve has in store. Indeed, if rate cut expectations are far greater in Canada than in the U.S., the loonie may very well test the US$0.70 level or fall below it for some period of time.
More pain coming for the loonie? US$0.62 on the horizon?
Fidelity’s David Wolfe had some startling things to say about the Canadian dollar earlier this year. He thinks the loonie could fall all the way to US$0.62 as Canada’s economy pulls the brakes a bit. Indeed, there doesn’t really seem to be an easy path forward for the Canadian economy, even if the U.S. economy looks to pick up traction. Though I’m not the biggest fan of timing currency fluctuations, I can’t say I’d be enthused to bet on the loonie against the greenback right here.
The stage does seem set for a lower loonie, especially as the Canadian consumer continues grappling with elevated debt burdens in this high-rate climate. Sure, the Bank of Canada may have recently hiked. But one small rate cut doesn’t mean we’re out of a high-rate environment. In any case, investors looking to hedge their bets against a falling loonie have plenty of ways to do it.
For one, you can buy some U.S. dollars from your bank. That said, you’ll be dinged a fee for such services. A far better way, in my opinion, is to bet on Canadian stocks that stand to view a lower loonie as a currency tailwind.
Here is one of my favourites.
TD Bank
TD Bank (TSX:TD) does a lot of business in the U.S. market, which makes it a prime pick for Canadians looking to gain more access to the U.S. dollar and its strength versus the loonie. The bank has been under severe pressure lately due to the money-laundering crisis. A lot of regulatory unknowns are involved with the name, and while some analysts are preparing for the worst, I’d argue that the worst may already be in the stock’s multiple right here.
Even if TD isn’t permitted to grow further in the U.S. for a few years as one of the penalties for the money-laundering fiasco, I’d argue the stock’s already going for a bargain-basement level at 12.6 times trailing price to earnings (P/E). The 5.4% yield is a fine bonus for contrarians as well as for investors who want to get paid while they wait.
Sure, growth in the States may stand to be limited, but don’t ignore the currency tailwinds that could help TD stock break out of its multi-year descent.
