January 4, 2008 / 10:03 PM / in 10 years

Bay Street Week Ahead: Hot C$ may singe corporate earnings

TORONTO (Reuters) - Canadian companies got a bitter taste of what a strong currency can do to profits in the last quarter. And, this upcoming season, the Canadian dollar may take an even bigger bite out of earnings.

The currency has just emerged from a banner year in which it logged a gain of about 17.5 percent and marched above parity with the U.S. dollar, in September, for the first time in 31 years.

It touched a modern-day high above US$1.10 in November, just after a slew of firms listed on the Toronto Stock Exchange <.GSPTSE blamed its rapid appreciation for lower third-quarter profits.

Fourth-quarter results, which will start emerging around the middle of January, are seen taking maybe a bigger hit, thanks to the Canadian dollar’s surge to its record high in this latest period.

“The strength of the Canadian dollar has basically lowered the earnings growth profile of the overall market, when you look at the average,” said Mario Richard, senior portfolio strategist at Sceptre Investment Counsel.

Manufacturers and retailers could feel the most pain, especially those with Canadian dollar costs and U.S. dollar revenues.

Retailers could also be bruised by the stampede of shoppers that headed south of the border to buy Christmas gifts with their high-flying Canadian dollar, nicknamed the loonie after the bird embossed on the coin.

Retailers “still haven’t lowered prices to where they should be, so technically their profit margins could be pretty good, but their earnings might be somewhat affected by slower sales,” added Richard.

RESOURCES STILL ON RISE

But because rising commodities have been the story heading into 2008, the resource-heavy S&P/TSX composite index should still see overall earnings growth when its listed companies report this month and early next.

That’s in sharp contrast to the United States, where subprime mortgage woes and the resulting credit crunch have taken hold. Stocks there are expected to post slightly negative earnings growth overall in the next quarter.

Canadian equities, particularly the big banks, also have the global credit crunch to worry about going into earnings season. But the loonie will play a key roll, at least in the near-term.

“I think the Canadian dollar overshot when it hit US$1.10,” said Patricia Lovett-Reid, senior vice-president at TD Waterhouse. “There was a lot of hype about it and the trajectory was very much up ... so what we’re seeing now is probably a more realistic valuation.”

The loonie hovered just above its U.S. counterpart most of this past week. Many expect it to stay around that level for at least the first quarter of 2008 before eventually trickling lower as the U.S. economy stabilizes.

That said, a counter-chorus of market watchers anticipate the United States will slip into a recession sometime this year. That view was bolstered by data on Friday that showed U.S. employers added only about a quarter the number of jobs last month that economists had expected.

Weakness in the United States, Canada’s biggest trading partner by far, would certainly infect the profits of TSX firms, compounding the hurt from a strong Canadian dollar.

“If the United States is not in a recession, it’s pretty darn close,” said Richard.

($1=$1 Canadian)

Reporting by Jonathan Spicer; Editing by Rob Wilson

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