The loonie has been taking quite the tumble in recent weeks, thanks in part to the U.S. Consumer Price Index (CPI) report, which has stayed a tad lofty. At this juncture, it seems like a given that the U.S. Federal Reserve (America’s central bank) may not be so quick to act with its rate cuts. Indeed, some predict the Fed will cut rates three times this year.
With inflationary pressures persisting, though, I would not at all be surprised if we exit 2024 without a single rate cut from Fed chairman Jerome Powell. As much as he’d like to trim rates by a bit, I’m not so sure inflation will let him, regardless of how dovish he wants to be after the past few years worth of relentless rate hikes.
At the end of the day, it’s inflation that will grant the Fed to cut interest rates. And right now, markets are just starting to wake up to the reality that rates may have to stay at these heights for a while longer. Personally, I think the Fed is right to hit that pause button for a while longer, at least until what remains of inflation has been put away for good. At the end of the day, that inflation genie is really hard to put back in the bottle. And if central banks give the genie a chance to escape, we may find that the longer-term consequences could be more severe.
The loonie could face serious pressure
In any case, expect nothing short of volatility as expectations go from three rate cuts in the U.S. to one or even zero. Perhaps it’s better to be cautious and look to 2025 for the start of U.S. rate cuts. In any case, Canada may have the means to lead when it comes to rate cuts. The Bank of Canada may be holding off for now, but I think it will have a chance to act in the second half. As the rate cuts do come flowing in, while the U.S. stands pat, expect the Canadian dollar to take a further hit, perhaps a huge hit.
Undoubtedly, there’s no telling how low the loonie could fall as the Bank of Canada considers cutting rates while the Fed stays on pause mode. Though I don’t think the loonie will “crater” as some economists seem to think, I think it’s only prudent for Canadian investors to prepare for a potential move below US$0.70 over the next year or so.
So, with that in mind, it makes sense to check out some Canadian companies that do plenty of business south of the border.
Alimentation Couche-Tard stock: A great pick-up on a correction
There are many ways to play a weak loonie relative to the greenback. One of my favourite plays is Alimentation Couche-Tard (TSX:ATD), a company whose stock I’ve been pounding the table on amid its recent correction.
The company owns thousands of convenience stores across the U.S. market. The U.S. dollars earned from these American stores will be worth a heck of a lot more as the loonie continues its steady descent as the Bank of Canada looks to be the first to cut rates.
Of course, Couche-Tard reports in U.S. dollars, and the weaker value of the loonie could make the Canadian operations seem weaker. That said, the key point is that Couche-Tard does more business down south than up here in Canada. And with a solid presence in Europe, any weakness in the loonie versus the euro could bode well for the firm through the eyes of Canadian investors who translate the company’s earnings back into Canadian dollars.
Either way, I think Couche-Tard is an earnings growth superstar who will be doing well, regardless of how strong or weak various currencies are at any given instance. The important thing is the firm’s growth story is sound. In the meantime, though, Couche-Tard will surely not mind a somewhat weaker Canadian dollar.
