March 10, 2011 / 1:57 PM / in 6 years

Trade surplus weakens on currency's strength

OTTAWA (Reuters) - Canada reported a much smaller-than-expected trade surplus in January as the red-hot Canadian dollar pushed imports up at a considerably faster pace than exports.

The trade surplus shrank to just C$116 million ($118 million) in January, Statistics Canada said on Thursday, as the value of imports hit a two-year high.

That was far less than the C$2.60 billion forecast by market operators. Statscan revised December's surplus down to C$1.71 billion from an initial C$3.00 billion.

The Bank of Canada has expressed consistent concern that the strength of the country's currency is undermining exports and crimping the economic recovery.

The bank said on March 1 that the export sector faced considerable challenges due to the currency's persistent strength -- it has been trading near three-year highs against the U.S. dollar this week -- and Canada's poor relative productivity performance.

Some analysts, however, noted that shipments abroad rose for the fourth consecutive month in January.

"We think that today's trade numbers actually have a more hawkish interpretation for the Bank of Canada, as the economy is coping quite well with what was deemed to be a persistent downside risk," said TD Securities analyst Jacqui Douglas.

Exports edged up by 0.8 percent to C$37.52 billion as higher shipments of automotive, industrial and energy products outweighed drops in exports of machinery and equipment as well as agricultural and forest products.

"In the short run, we think the emerging strength in exports should outweigh the Bank of Canada's longer-run concerns," said Jonathan Basile of Credit Suisse Securities.

Imports rose by 5.3 percent from December to C$37.40 billion, the highest level since November 2008, as automotive shipments jumped by 16.2 percent and energy-product imports increased 13.8 percent.

"Overall, the report isn't too negative despite the drop in the surplus as two-way trade continue to ramp up in line with the recovering global economy," said Krishen Rangasamy of CIBC World Markets.

The data helped push Canada's dollar to a one-week low against the greenback. It dropped as low as C$0.9753 to the U.S. dollar, or $1.0253, down from Wednesday's close of C$0.9687 to the U.S. dollar, or $1.0323.

Analysts Derek Holt and Gorica Djeric of Scotia Capital struck a gloomier note, saying import volumes had risen by 5.5 percent from December, while export volumes increased by just 1.0 percent.

"This vindicates Bank of Canada concerns -- and ours -- over the uncertainty facing the direction of Canadian trade through a loss of export competitiveness via weak productivity and a strong Canadian dollar," they said in a note.

Reporting by David Ljunggren; editing by Peter Galloway

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