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Cheap travel may be at risk if Canadian dollar continues to fall

Linda Nguyen, The Canadian Press

A Canadian dollar coin, or loonie, and an American dollar are balanced on a scale in Quebec City, on April 7, 2010. THE CANADIAN PRESS/Jacques Boissinot
A Canadian dollar coin, or loonie, and an American dollar are balanced on a scale in Quebec City, on April 7, 2010. THE CANADIAN PRESS/Jacques Boissinot

TORONTO - A lower loonie may be good news for many Canadian businesses but, over time, consumers may see prices creep up for those popular vacations to warmer climates, and fewer reasons to shop online or in the U.S.

The Canadian dollar lost another 0.27 of a cent on Wednesday, to close at 92.56, a price not seen since October 2009. On Tuesday, it fell more than a penny to 92.83 cents US.

David McCaig, president of the Association of Canadian Travel Agencies, said a weakened Canadian dollar has had little to no effect on Canadians booking vacations down south but, if the trend continues, history may repeat itself.

Back in 2009, McCaig said travel agencies across the country saw declines in the number of vacations Canadians were booking.

Instead of packing their bags and heading south or to the Mediterranean, many opted to have a "staycation" or travel within the country to stretch their dollar.

The travel industry may see this again if prices for vacations begin to creep up on a lower Canadian dollar, he said.

For now, agencies continue to see a lot of "pent-up demand" to get away to the Caribbean, the U.S. and Europe, an urge exacerbated by the frigid temperatures that have recently gripped most of Canada.

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

"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."

Most vacations are still being listed at last summer's prices, when the Canadian dollar was stronger. Those prices are likely to stick for the next few months but will rise if the loonie continues to fall.

McCaig noted that a lower loonie over the long-term will boost travel to Canadian destinations.

"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."

Business professor Ambarish Chandra said U.S. retailers who depend on Canadians crossing the border to do their shopping will also feel the pinch.

Online shopping will also see declines, as items such as books, clothing and electronics will no longer be cheaper if purchased in the U.S.

But ultimately, he said, a lower loonie will be a boon for Canadian businesses.

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

He said goods from Canadian exporters will be seen as more competitive and cheaper in the eyes of foreign buyers. Another benefit will be that most goods are priced in U.S. dollars.

Chandra said manufacturers who rely heavily on goods and parts made overseas will feel squeezed if they end up paying more due to a weakened currency.

Nevertheless, companies are now more prepared to deal with a weaker loonie, said David Sparling, a professor at Western University's Ivey Business School.

"When the loonie started to rise in the last decade, it did hit a lot of companies, both who compete with imports or those who export. We certainly saw it across most manufacturing sectors," he said.

"But companies used that time to purchase new equipment in order to stay in business and cut costs to become more efficient... With the loonie starting to drop again, hopefully we can use that to our advantage and hopefully this will bring more business to Canada."

Most experts forecast the dollar will continue to decline over the next several months, perhaps falling to as low as 90 cents US this year.

The dollar's fall should not come as a surprise, as it's been predicted for some time that Canadians should not expect it to stay at parity with the U.S. dollar. 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, a currency specialist for Scotiabank.

She predicts the loonie will stabilize around 92 cents US. Other economists, including Doug Porter of the Bank of Montreal, forecast that the loonie will drift towards 90 cents over the next few years.

The currency has been under 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.

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