A stronger Canadian dollars is starting to crimp corporate profits, most painfully in the manufacturing sector, says National Bank Financial.

Operating profits of Canadian corporations slipped 0.7% in the second quarter from the record level of the first quarter, to $62.1 billion, NBF reports. “The drop was concentrated in financials (down 1.4%) and particularly in manufacturing (off 6.3%). In the latter case, this was a third consecutive drop in profits,” it notes, adding that Canadian manufacturers export about half of their production, mostly at U.S. dollar prices.

During the second quarter, the Canadian dollar appreciated 6.7% against the US dollar, over its average value in Q1. “Such a fast appreciation has a large negative impact on profits stated in Canadian dollars,” NBF notes.

And, it finds that profits declined in eight of the 13 major manufacturing industries. Two sectors heavily impacted by soft U.S. demand, forest products and motor vehicles & parts, actually reported losses, it says. “Looking ahead to Q3, the environment remains challenging for Canadian manufacturers as they have to contend with both a stronger Canadian dollar as well a more frugal U.S. Consumer,” it concludes.