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Loonie’s luck runs out as dollar forecasts revised even lower

Fin - Balance Sheet - CA

Cross border shopping has suddenly become a lot less attractive for Canadians.

The Canadian dollar has nosedived, falling below the 90-cent (U.S.) mark last week for the first time since 2009.

Economists are calling January one of the worst months for the loonie since the 1950s, with no relief in sight for at least the next few months.

"The downward trend in the Canadian dollar is too strong to fight or attempt to pick a bottom," Scotiabank chief currency strategist Camilla Sutton wrote in a note on Friday.

"We expect ongoing Canadian dollar weakness before it stabilizes in the second half of the year."

The lower loonie has its pros and cons for people and businesses across Canada. Of course those shopping and vacationing south of the border will feel the hit, but companies that make big purchase in the U.S. are also impacted. For instance, Air Canada said recently it expects the falling loonie to increase its costs.

On the flip side, companies that sell in U.S. dollars and have Canadian dollar expenses will benefit. That includes manufacturers as well as many mining and oil and gas companies.

For the overall economy, experts see arguments on both sides of the coin’s drop.

“There are many reasons to be negative about the currency in the near-term,” says TD Bank economist Francis Fong, calling for the dollar to drop to 85 cents by the summer.

“However, one should not take the currency's pullback as a sign that the Canadian economy is down and out. The reality is quite the opposite.”

She points to the latest GDP data for November showing some momentum in economic growth.

“This sets the stage for a more robust pace of growth in 2014,” Fong says.

Bank of Montreal senior economist Benjamin Reitzes believes the loonie is trading at “fair value,” right now, and expects it to fall to around 87 cents in the coming weeks, before recovering later this year.

He cites the increasingly dovish tone from the Bank of Canada and depressed commodity prices as drivers of the loonie’s recent descent.

“Until expectations for commodity prices turn higher or the Bank of Canada changes gears toward more hawkishness, the risk is tilted toward more weakness than expected,” Reitzes writes. “That should bring a smile to exporters and some domestic retailers, but will markedly raise the price of travelling abroad and put a serious dampener on cross-border shopping enthusiasts.”

Of course, if the winter continues to be as cold and icy as it has across parts of the country, Canadians won’t care about paying extra on that trip to sunny Hawaii or Florida.