EXPORTS FALL FOR 3RD STRAIGHT MONTH, WIDENING CANADA’S TRADE GAP

Canada’s trade picture continued to deteriorate in August as exports dropped for a third straight month and the deficit unexpectedly widened.

Key Takeaways

Exports are suffering one of their biggest tumbles ever over the past three months after touching records. That may fuel concern the nation’s currency has been accelerating too quickly. Canada’s dollar has advanced about 7 percent over the past six months.

The slumping trade performance also means Canada’s expansion is losing a major engine in the second half of the year, reinforcing expectations its growth rate is poised to slow from levels over the past year rarely seen in the past couple of decades. Economists had been anticipating annualized growth of about 2.5 percent in the third quarter, from 4.5 percent in the second quarter.

Market Reaction

The report reinforces expectations the Bank of Canada which has been signaling it’s concern about the stronger Canadian dollar won’t move ahead with another interest rate increase at a rate decision later this month.

The Canadian dollar dropped 0.5 percent to C$1.2539 per U.S. dollar at 9:54 a.m. in Toronto, and is down 3.4 percent since touching a two-year high on Sept. 11. Swaps trading suggests investors are pricing in less than a 20 percent chance of a rate increase at the Bank of Canada’s Oct. 25 decision.

What Economists Say

Nick Exarhos, CIBC Economics: “After a rough two months, it got uglier for Canadian exports in August.” “That supports our call for a 2 percent or so growth pace for the third quarter, and for the Bank of Canada’s ‘monitoring’ of the economy to translate into a pause in interest rate hikes.”

Robert Kavcic, BMO Capital Markets: “In case there was any doubt that peak Canadian growth is behind us, this report all but cements the case.”

Other Details

  • In volume terms, exports declined 1.9 percent and have fallen for three consecutive months for the first time since 2011. Real imports fell 0.2 percent
  • Non-energy exports are down for the third month in a row, dropping 2.8 percent from a year earlier
  • Auto plant shutdowns that have been longer than usual continue to play a role, with shipments of motor vehicles down 0.5 percent
  • It’s only the second time in the last three decades that exports have declined by more than 10 percent in three months outside of a recession
  • Energy products, precious metals, and motor vehicle exports in that order are the three biggest drivers of the three month slump
  • Electronic and electrical equipment exports (2.5 percent) and energy production (1.5 percent) led gainers in August

Source: Bloomberg

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