Canada current account gap rises, currency seen overvalued

Thu Nov 29, 2012 11:43am EST
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By David Ljunggren

OTTAWA (Reuters) - A drop in exports helped push Canada's current account deficit close to a record high in the third quarter, a development that analysts said sends a signal that the Canadian dollar is too strong.

The deficit rose 2.9 percent from the second quarter to C$18.91 billion ($19.10 billion), Statistics Canada said on Thursday. Though smaller than the C$19.20 billion gap expected by analysts, it was the second largest on record after the C$19.43 billion posted for the third quarter of 2010.

BMO Capital Markets economist Robert Kavcic predicted the deficit would end up equaling around 4.1 percent of gross domestic product. Figures for third quarter GDP will be released on Friday.

"A current account deficit of around 4 percent of GDP is a clear warning sign that the Canadian dollar is over-valued," Kavcic said in a note to clients.

The data initially helped push down the value of the Canadian dollar. At 10.15 a.m. (1515 GMT) it was at C$0.9935 against the U.S. dollar, or $1.007, down from C$0.9915, or $1.0086, before the figures were released.

The overall deficit for trade in goods was C$4.84 billion, up from C$3.64 billion in the second quarter. Exports fell by C$3.73 billion to C$112.75 billion, in part due to lower energy shipments, while imports dropped by C$2.54 billion to C$117.58 billion.

Exporters are struggling with weak foreign markets and the strong Canadian dollar, which erodes the competitiveness of their goods.

"Despite continued foreign investment inflows into the Canadian dollar, trade fundamentals continue to suggest overvaluation," Emanuella Enenajor of CIBC World Markets Economics said in a note to clients.   Continued...