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05/09/2013

Looks like the loonie will fly south

Loonie
TD Economics published a paper Thursday regarding a weakening Canadian dollar. (STEVE RUSSELL/TORONTO STAR)

Were you secretly hoping the Canadian dollar was going to continue to hold strong against the greenback so you could vacation and shop in the U.S. with less wallet guilt?

Well, economists are about to rain on that parade.

The weakness shown by the loonie in the last six months is about to become the norm and get a wee bit worse, according to TD bank. TD Economics published a paper Thursday regarding a weakening Canadian dollar.

TD expects the dollar to drop to the 90 - 92 cents (U.S.) range by late 2013 and early 2014.

A 90 cent Canadian dollar isn't exactly weak, said Francis Fong, a TD economist. He pointed out it is a far cry from 2001 when it was in the 60 to low 70 cent range.

But after going strong for the last several years, the loonie has started to look a bit tired. Since last September, the Canadian dollar has fallen from above $1.03 (U.S.) to as low as 97 cents, said Fong.

There are a number of reasons why the decline could continue.

First, the Canadian economy is expected to underperform the U.S. in the next coming months. "That is a major reason why the loonie has been so strong -- we were heavily outpacing the U.S. in job growth, GDP activity and so forth," Fong said in an interview.

And, the fall of the Japanese yen, along with the nation's economy, is bolstering the U.S. dollar.

Not to mention commodity prices, a major driver of Canada's economy, are soft and the slow pace of global growth means the price of precious and base metals are probably not going to magically increase and strengthen the loonie.

While Canadian consumers and those among us eyeing inexpensive property in Florida may not appreciate the loonie's dip, it is a good thing for the Canadian export businesses.

"There is always two sides to the story in economics and we are a very consumer spending economy," said Fong.  

Here's a not so fun, slightly scary fact -- nearly two-thirds of the Canadian economy is consumer spending dependent.

"A weaker dollar helps make a transition away from consumer spending and towards the export sector," he added.

And that, in the long run, will benefit all Canadians.

Tanya Talaga is the Star's global economics reporter. Follow her on Twitter @tanyatalaga

 

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