July 6, 2017 / 1:39 PM / 3 months ago

WRAPUP 2-Canada trade data shows economic strength ahead of rate decision

(Adds analysis, Canadian dollar reaction)

By David Ljunggren

OTTAWA, July 6 (Reuters) - Canadian exports and imports both hit record highs in May, Statistics Canada said on Thursday, reflecting continued economic strength ahead of a highly anticipated interest rate decision next week.

Although the trade deficit almost doubled to C$1.09 billion ($845 million), that was partly due to one-time imports of five new airliners. Analysts in a Reuters poll had forecast a shortfall of C$530 million.

The Bank of Canada is set to make an interest rate announcement on July 12. Markets increasingly expect a hike to come soon as the economy recovers from a prolonged shock caused by low oil prices.

The central bank, which cut rates twice in 2015 to help contain the damage, has consistently fretted about what it says are disappointing non-energy exports.

“How Canada’s trade picture is tracking into the second quarter will put yet more wind into the Bank of Canada’s sails,” said Derek Holt of Scotiabank Economics.

“An almost perfect combination of ripping exports and enough strength in the domestic economy to pull in more imports reflect what the Bank of Canada has emphasized to be more diversified growth,” he added in a note to clients.

Canadian companies are more optimistic about future sales and exports, while improving demand should boost investment and hiring, the central bank said last week, increasing expectations for a rate hike.

Imports climbed 2.4 percent to C$49.77 billion, their sixth consecutive gain, on increased purchases of aircraft and other transportation parts.

Exports rose 1.3 percent in May from April to hit C$48.69 billion, thanks to shipments of unwrought gold to the United Kingdom as well as motor vehicles and parts.

Export Development Canada Chief Economist Peter Hall said eight of the 11 main export sectors had grown for three consecutive months.

“This is really strong evidence of a broadly based increase,” he said. “It gives us confidence that there is real muscle behind this.”

The Canadian dollar was little changed, trading at C$1.2935 to the greenback, or 77.31 U.S. cents.

Exports to the United States, which accounted for 74.5 percent of all Canadian exports in May, dipped by 0.3 percent, while imports from the southern neighbor rose 3.6 percent. As a result, Canada’s trade surplus with the United States shrank to C$3.53 billion from C$4.76 billion in April.

Separately, Statscan said the value of Canadian building permits issued in May jumped 8.9 percent on plans for more construction of residential buildings.

Additional reporting by Fergal Smith in Toronto; Editing by Lisa Von Ahn

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