The confluence of rapid Canadian interest-rate hikes and the corresponding decline in the value of the Canadian dollar is fuel for some ÎÚÑ»´«Ã½ businesses – particularly those that export to the U.S. and have Canadian employees.
While both the Bank of ÎÚÑ»´«Ã½ (BOC) and the U.S. Federal Reserve (U.S. Fed) are cutting interest rates, the BOC has snipped more rapidly, slashing the country’s key interest rate in , from five per cent in May.
The U.S. Fed sets its federal funds target rate in ranges, as opposed to exact rates. Its rate is now in the 4.75-per-cent-to-five-per-cent range, down from May, when it was in a range between 5.25 per cent to 5.5 per cent.
Investors therefore get significantly higher returns in investments in U.S. treasuries than in Canadian interest-bearing products.
That steers investment to the U.S., driving demand for U.S. dollars more than Canadian ones.
The loonie’s slide started weeks ago, after , in part because the buzz in Canadian financial circles was that the BOC would make an outsized cut this month.
Investment-industry watchers were not surprised when the BOC on Oct. 23 cut its key interest rate by 50 basis points – the largest such cut since March 2020, when the world was adjusting to the COVID-19 pandemic.
Foreign-currency market participants similarly anticipated the cut, and future cuts, which was likely why the Canadian dollar has declined in the past four consecutive weeks – the longest such streak since January.
On Friday, the loonie hovered near a 12-week low against the U.S. dollar, down 0.43 per cent on the week, to US$72.18.
It then continued its slide on the weekend to be at US$71.94 late Sunday night Vancouver time. That's the lowest level since Aug. 5, when it touched US$71.73 but was only below the current level for a single day. Before that, the last time the dollar was lower was on Oct. 13, 2022, when it hit US$71.58, .
Which companies benefit from a low loonie, and low interest rates
Companies that benefit in this situation are those that have expenses in Canadian dollars and revenue in U.S. dollars.
Lululemon Athletica Inc. (Nasdaq:LULU) may benefit. The yogawear maker is so large that various foreign currency fluctuations always have some impact on its earnings.
Store revenue and costs at the clothing company would always be in each store’s local currency.
Head office expenses at its many Vancouver offices, however, are always in Canadian dollars.
Conversely, U.S. owners of Canadian revenue-producing assets lose out when the Canadian dollar falls.
Kirsten Lynch, CEO at Whistler Blackcomb’s Colorado-based owner Vail Resorts Inc. (NYSE:MTN), for example, told investors on an earnings call in September that her company’s accounting estimated a Canadian dollar exchange rate of $0.74.
It raised ski-pass prices by about eight per cent this year under that assumption. If the Canadian dollar stays closer to US$0.72, the company will get less money than expected when the revenue is converted into U.S. dollars.
Businesses also benefit from rate cuts because it becomes cheaper for them to borrow money to buy new equipment. They also benefit because some customers will feel wealthier.
Some consumers who have loans will need to pay less interest if their loan’s interest rate changes.
They will therefore have more money to spend at stores.
“The [BOC] expects to see more consumer spending and business investment as interest rates decline,” said Central 1 chief economist Bryan Yu.
“There will be a drag from slower population growth, but per capita consumption is forecast to increase.”
Storkcraft CEO Adam Segal told BIV that he likes lower interest rates because it can encourage potential home buyers to make their purchases.
“A strong housing market is usually a good thing for furniture companies,” said Segal, whose company specializes in cribs and children’s furniture, such as dressers and chairs.
New home owners often buy new furniture to fit in their new dwellings.
The biggest economic policy decision that could impact Segal’s business, however, is one that is likely to come if Donald Trump wins his bid to be U.S. president, he said.
Trump has .
“Tariffs are something that's on everyone's mind right now,” said Segal.
His company makes many products in China.
“The US. doesn't have the infrastructure to make products at the prices we need and at the volumes we need, but we are starting some U.S. production soon for one or two categories.”
Blair Bullus’ plant-based food manufacturing company Wamame makes products for sale in ÎÚÑ»´«Ã½ and the U.S.
“We expect that we will be able to start production on a new product line because the supplier is upgrading equipment and investing in the manufacturing line,” he said.
Bullus added that if interest rates were to stay as high as they were in May, the company that he contracts to make some products would not have invested in the new equipment to make some of his new products.
“We have a slightly premium product line,” he said. “Anytime someone has more money to spend, that's good for premium products.”
Restaurant owners are similarly relieved that the BOC has been rapidly cutting interest rates.
“The cuts are going to take a while to flow through the economy, but let's face it: any cut in interest rates will put some extra dollars in the consumer's pocket for that extra coffee or glass of wine,” Romer’s owner Kelly Gordon told BIV.
Consumers’ willingness to spend more money is unlikely to come right away, some say.
“It will be another five or six months before people really feel the effects,” said Andrew Jameson, who plans to close his Say Mercy! restaurant at 4298 Fraser Street on Nov. 2.
He plans to focus his time on his two other eateries: Mackenzie Room at 415 Powell Street and Collective Goods at 3532 Commercial Street.
The BOC’s interest-rate cuts are “a step in a direction that will hopefully lead to consumers having a little bit more free cash flow to enjoy things like meals out and have some extra cash for things that are considered luxury experiences,” he said.
