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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 some analysts said adds to evidence the Canadian dollar is overvalued.
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 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.
Citing the big current account deficit and other signs the domestic economy is struggling, BMO issued a report estimating that the Canadian dollar, "the titanium of the currency world", is at least 10 percent stronger than current commodity prices dictate it should be.
The current account data weighed on the currency on Thursday. At 2:16 p.m. (1916 GMT) it was at C$0.9926 against the U.S. dollar, or $1.0075, 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.
The Canadian dollar is up more than 6 percent versus the greenback since the end of 2009 and more than 60 percent over the last decade.
Benjamin Reitzes, BMO's senior economist and foreign exchange strategist who co-authored the bank's report, cautioned that a currency can be misvalued on a fundamental basis for a very long period of time.
He said this could be the case for the Canadian dollar until 2015, when the U.S. Federal Reserve is expected to start hiking interest rates, triggering a gradual U.S. dollar rally.
Until then, "unless you see some significant global economic weakness and softness in commodity prices, you're not going to see any meaningful selloff in the Canadian dollar despite the fact that we believe it's overvalued," Reitzes said.
Many analysts believe the currency will hold close to parity for the coming year, helped by Canada's triple-A credit rating and the resulting inflows of foreign capital.
Canada, which emerged from the recession in better shape than most major world economies, is seen as something of a safe haven, and this has helped keep the currency strong. Some central banks have increased holdings of Canadian dollar assets to diversify their foreign exchange reserves.
A public information notice from the International Monetary Fund this month supported the idea of having big currency holders such as central banks disclose more details on their holdings of Canadian dollars.
Foreign investors acquired C$28.15 billion in Canadian securities in the third quarter, compared with C$28.50 billion in the second quarter. Canadian investment in foreign securities jumped to C$8.91 billion from C$2.81 billion.
The current account figures showed Canada's third-quarter deficit on trade in services edged up by C$0.29 billion to a record C$6.28 billion, while the deficit on investment income shrank by C$1.21 billion to C$6.26 billion.
"This report is consistent with the theme of an unbalanced economic recovery where a combination of international headwinds and strong domestic demand (fueling imports) has weighed heavily on net exports," said TD Securities strategist David Tulk.
Analysts polled by Reuters last week forecast third-quarter annualized GDP growth of just 0.9 percent from the second quarter, less than the Bank of Canada's forecast of 1.0 percent.
Separately, Statistics Canada said the country's producer price index dropped by 0.1 percent in October from September on lower prices for petroleum and coal products.
The drop, which matched market expectations, means the index returned to the same level it was at in January. Compared with October 2011, industrial product prices fell by 0.2 percent, the third consecutive year-on-year drop.
Raw material prices were unchanged in October, when a 2.3 percent decrease in prices for non-ferrous metals was offset partly by a 0.5 percent increase in crude oil prices. Analysts had predicted a 0.9 percent drop from September.
Raw materials prices, which were unchanged from September, dropped by 2.8 percent from October 2011, the eighth year-on-year decline in a row.
Additional reporting by Claire Sibonney; Editing by Peter Galloway