* Deficit up 2.9 percent from Q2 to C$18.91 billion
* Canadian dollar edges lower after data released
* Deficit on trade in services hits record high
By David Ljunggren
OTTAWA, Nov 29 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
Exporters are struggling with weak foreign markets and the
strong Canadian dollar, which erodes the competitiveness of
"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.
CENTRAL BANK INTEREST
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.
PRODUCER PRICES EASE
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.