UPDATE 2-Canada trade deficit shrinks as exports to US grow

* Trade deficit shrinks more than expected to C$1.35 bln

* Exports to U.S. surge for first time since May

* Trade still seen dragging down Q3 growth

* Bank of Canada likely to hold rates steady until 2011
(Adds analysts’ comments, market reaction, details)

OTTAWA, Oct 14 (BestGrowthStock) – Canadian exports to the flagging
U.S. market surged in August after two months of declines,
helping to shrink the country’s trade deficit and to soften
fears that economic recovery may have stalled.

A 2.7 percent jump in shipments to the United States, which
bought 74 percent of Canada’s exports in August, boosted
Canada’s trade surplus with its neighbor for the first time in
eight months, Statistics Canada said on Thursday.

Exports overall grew 3.1 percent while imports slipped 0.5
percent, narrowing the trade deficit to C$1.35 billion ($1.35
billion) from a revised C$2.55 billion in July, and beating the
market forecast of a C$2.40 billion shortfall.

The figures point to a resumption of economic growth in
August after a slight downturn in July. But with the Canadian
dollar flying high against the U.S. dollar, analysts said the
overall trend in trade remains weak and will continue to hold
the economy back in the third quarter.

As a result, the Bank of Canada will likely leave its
benchmark interest rate untouched next week after raising
borrowing costs three times between June and September.

“With recent inflation reports generally
surprising on the downside and the pace of the U.S. recovery
slowing, the economic conditions are such that the Bank of
Canada is likely to move onto the sidelines, holding the
overnight rate unchanged at 1 percent at next Tuesday’s
policy-setting meeting,” said Paul Ferley, assistant chief
economist at Royal Bank of Canada.

RBC expects the central bank to resume tightening credit in
March 2011.

The market has priced in a 90.7 percent chance the bank
will hold rates steady next Tuesday, according to a Reuters
calculation based on yields on overnight index swaps.
(BOCWATCH: )

The Canadian dollar (CAD=D4: ) had pushed through parity
against the U.S. dollar before the release of the trade report
on Thursday after Singapore unexpectedly tightened policy by
letting its currency strengthen, hitting the U.S. dollar
hard.

It was the Canadian dollar’s first move above parity since
April. The currency then lost some of its gains but jumped
again immediately after the trade numbers were published to
$1.002.

TRADE A DRAG ON GROWTH

The Canadian dollar’s ascent, combined with the crippled
U.S. economy, have contributed to a slowdown in Canada’s
crucial export sector. The August report was a rare sign of
strength.

Industrial goods and materials led the export gains,
buoyed by high metals prices, followed by other consumer goods.
All export sectors grew in August except the auto sector, where
an increase in passenger car sales was not enough to offset a
decline in sales of other vehicles and in auto parts.

But the upbeat story for August was not enough to offset
the declining trend in Canadian trade, analysts said, following
the steep drop-off in exports at the end of the second quarter
and in July.

“The real trade deficit is tracking 15.6 percent larger in
the third quarter than in the second quarter,” said Scotia
Capital economists Derek Holt and Goria Djeric in a note to
clients.

“Smoothing through the improvement in August, the trend is
more pointed toward net trade being a sustained drag on the
Canadian economy,” they wrote.

The government said this week it expects annualized
economic growth of 1.8 percent in the third quarter, based on
the average forecast of private sector economists. That is down
from 2 percent in the second quarter and 5.8 percent in the
first quarter.

Imports in August slipped 0.5 percent to C$35.33 billion,
slightly below the forecast of C$35.40 billion. A drop in car
imports was the main culprit.

($1=$1.00 Canadian)
(Reporting by Louise Egan and Howaida Sorour; editing by Peter
Galloway)

UPDATE 2-Canada trade deficit shrinks as exports to US grow