Loonie drops to lowest level since 2009

As the Canadian dollar falls to its lowest level in more than three years this week, many are wondering how much further it has to go.

With most currency experts forecasting that the dollar will continue to decline over the next several months, perhaps falling to as low as 90 cents US this year, many say a lower loonie will be a boon for Canadian business.

"Something like this will always be good for Canadian businesses whether they acknowledge it or not," said Ambarish Chandra, a business professor at the Rotman School of Management at the University of Toronto.

"When the loonie is weak, it makes foreign firms and prices appear more expensive and naturally domestic firms will always benefit."

Tapering expected

A weaker Canadian dollar will ultimately lead to more consumers spending their money at home, rather than across the border. For instance, shopping trips to the U.S. as well as online purchases made from American companies will start to look less lucrative for Canadian shoppers if the loonie continues to drop.

Chandra said Canadian exporters will also benefit as their goods will be seen more competitive and cheaper in the eyes of foreign buyers. And although it will be advantageous for the majority of Canadian firms, he noted that manufacturers who rely heavily on goods and parts made overseas will feel the squeeze as they will end up paying more now with a weakened currency.

The loonie lost more than a penny to close at 92.83 cents U.S., on Tuesday, a price not seen since early November. Downward pressure continued to build on Wednesday and it closed the day down further at 92.37 US.

The fall should not come as a big surprise, as it's been forecast for some time that Canadians should not expect parity with the U.S. dollar over the short-term. The last time it closed at parity with the greenback was in February 2013.

"Most of the fundamental pieces have been in place for a weaker Canadian dollar," said Camilla Sutton, currency specialist for Scotiabank.

Sutton predicts the loonie will continue to weaken over the next six to eight months, and stabilize around 92 cents U.S. Other economists including Doug Porter of the Bank of Montreal forecast that the loonie will drift lower towards 90 cents over the next few years.

The currency has been feeling pressure from a rising U.S. dollar, driven by an overall strong outlook and the Federal Reserve's decision to begin tapering its $85-billion of monthly bond purchases by $10 billion this month.

Trade deficit grows

It was also pulled down on Tuesday after Canada's trade deficit was reported to have worsened slightly in November, rising to $940 million from $908 million in October.

"As the U.S. economy strengthens, our exports are expected to recover. That should allow for some stabilization and a less dovish tone coming from Canada," Sutton said.

"But that's kind of the second half of the year story. The story right now is certainly one of CAD weakness."

David McCaig, president of the Association of Canadian Travel Agencies, said the lower loonie has had little to no effect so far on travel, but if it continues to decline, history may repeat itself.

"It's cold enough in Canada that everyone wants to get away," said McCaig, whose group represents 2,000 agencies across the country.

"There's been very little differences with purchases of holidays like doing a week in Mexico, going to Las Vegas or Miami, Florida. That's because most Canadians feel they have the right to have a holiday and they're going to take it."

Travel may get pricier

McCaig said there's also been a lot of "pent-up demand" for travel to the Caribbean, the U.S. and Europe, after many decided to forgo the international trip for a staycation when the loonie weakened in late 2009.

Prices for these vacations will likely stay at current levels over the next four months, but could rise if the dollar continues to drop, he warned.

McCaig noted a lower loonie over the long-term will undoubtedly help tourism industries in top Canadian destinations like Victoria, B.C. and Toronto over the high summer season.

"That's part of what happened when our loonie was so high. Americans had been used to coming to Canada before that, having a big discount or value for their dollar and didn't mind paying the taxes," he said.

"A dropping loonie is frankly good for Canadian business. (Tourist destinations) are going to be happier to have Americans come here."