The U.S. Federal Reserve’s first interest-rate increase since July 2023 has introduced a new variable for Canadian investors, refocusing attention on the relationship between U.S. monetary policy, the Canadian dollar, and corporate earnings.
The Fed increased its benchmark policy rate by 25 basis points to the target range of 3.75%–4.00%. While the move changes the U.S. monetary-policy environment, it does not mean the Bank of Canada will necessarily follow the same path.
The Bank of Canada had kept its policy rate unchanged at 2.25% in September. The divergence between the two central banks matters because interest rate differentials can influence currency movements, investment flows, and the relative attractiveness of Canadian assets.
For Canadian equities, therefore, the more important question may not be whether rates in Canada rise following those in the U.S., but how changes in the Canadian dollar and cross-border business exposure affect individual companies.
Source: Official White House photo by Daniel Torok
The Canadian dollar can have a mixed impact on Canadian stocks
One of the clearest ways U.S. monetary policy can affect Canadian companies is through foreign exchange.
If the U.S. dollar strengthens against the Canadian dollar, Canadian businesses with substantial U.S.-dollar revenue can benefit when they convert those earnings back into Canadian dollars. However, Canadian companies that rely heavily on imported products, equipment, or other U.S.-dollar-denominated costs may see expenses rise as the Canadian dollar weakens. Businesses with U.S.-dollar debt can also face additional foreign-exchange pressure.
That makes the impact of the Fed’s decision highly dependent on a company’s geographic revenue mix, cost structure, balance-sheet composition, and ability to pass higher costs on to customers.
TD’s U.S. exposure could support growth
Toronto-Dominion Bank (TSX: TD) shows how having businesses in different countries can help a bank manage changing interest rates. The Canadian banking giant recently reported a strong quarter, with record earnings in its Canadian and Wholesale Banking businesses. Its U.S. Banking business also performed well, with profits rising 41% in the third quarter.
TD’s U.S. business grew as loans to middle-sized companies and credit card balances increased. Its U.S. Wealth business also benefited from higher investment assets. TD Auto Finance U.S. was another strong area.
Higher U.S. interest rates can help banks earn more from loans. However, banks also face higher funding costs, changes in customer deposits, weaker loan demand, and potential credit problems.
Overall, TD benefits from operating in both Canada and the U.S., giving it exposure to two different economies and interest-rate environments.
CES Energy shows the other side of the currency equation
CES Energy (TSX: CEU) offers another perspective on the consequences of a stronger U.S. dollar. The company has significant exposure to the U.S. market, and its U.S. revenue reached a new quarterly record in the second quarter of 2026. Revenue rose 14% sequentially from the first quarter and 23% from the same quarter a year earlier.
Recent acquisitions, customer awards, higher production activity and an improved market position supported the increase.
Yet the company’s earnings reflect why a weaker Canadian dollar is not automatically beneficial for every cross-border business. CES’s net income remained under pressure from higher foreign-exchange losses associated with the appreciation of the U.S. dollar. However, those losses were partly offset by record revenue and strong margins.
The bigger picture goes beyond interest rates
The Fed’s decision matters, but it does not change the core businesses of TD or CES.
TD has a strong, diversified business, a solid balance sheet, and growth opportunities through its U.S. operations. CES continues to benefit from long-term demand for energy and oilfield services, including higher activity and growing use of advanced chemical solutions.
Bottom line
The Fed’s first rate hike since 2023 may create uncertainty for Canadian markets, especially through changes in the Canadian dollar and money flows. However, long-term business performance will depend more on customer demand, profit margins, financial strength, costs, and the markets Canadian companies serve.
