November 29, 2012 / 1:47 PM / in 5 years

Canada current account gap rises, currency seen overvalued

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.

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 dollar strong.

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.

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 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.

Reporting by David Ljunggren; Editing by Peter Galloway

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