By Akhil Shah

OTTAWA (MNI) – Canada is expected to post yet another trade deficit
in October, in Statistics Canada’s monthly report coming out Friday
morning.

The key factors behind the deficit continue to be the appreciating
Canadian dollar and the weak U.S. demand for Canadian exports. They are
expected to improve slightly in October, narrowing the deficit
marginally by C$500 million to C$2.0 billion from C$2.5 billion,
according to economists surveyed by Market News International.

Canada began a robust economic recovery late last year which
remained on path through the first quarter this year. However, the
recovery began to be dragged down as several decades of merchandise
trade surpluses for Canada gave way in March to a deficit of C$236
million, which rose to a high of C$2.51 billion in July. October will
mark the seventh consecutive deficit as the economy continues to descend
into a slow second half of 2010.

The Bank of Canada expressed concerns about the same factors, about
net export holding back economic growth, in its rate announcement
Tuesday. This concern about trade, along with the appreciating Canadian
dollar, led the bank to leave its overnight rate unchanged at 1.0% for
the second time.

In September the trade deficit expanded by more than C$900 million,
to C$2.5 billion from C$1.3 billion in August, only C$26 million below
the record deficit of C$2.54 billion Canada posted in July. Export
levels overall have been relatively unchanged since the start of this
year, but imports have been higher — due to still-solid Canadian
spending and to the strong Canadian dollar, Douglas Porter, Bank of
Montreal’s deputy chief economist, wrote to clients.

Canada’s trade surplus with the United States accounts for more
than 70% of Canadian exports and has been trending downwards well over
the last year traditional levels. Although the U.S. accounts for the
majority of Canadian exports, there has been some increase in sales to
Europe, China and other countries this year, mitigating slightly the
weakening trade with the U.S.

Krishen Rangasamy, economist at the Canadian Imperial Bank of
Commerce, expects the trade deficit to “improve” to C$2 billion. “Crude
prices recovered a bit in October, which could help the export side and
imports would be helped by the stronger Canadian dollar,” Rangasamy
added.

“Automotive exports will likely remain soft as the domestic
automotive data suggests a pullback in trade associated with this
sector,” Rangasamy said.

Stewart Hall, economist with HSBC Securities, also expects the
deficit to narrow to C$2 billion. “We expect there will be some
improvements on the exports front,” Hall said. He identified a pipeline
issue, auto sector improvement and a rebound in copper exports.

“By October, most of the issues that were plaguing the energy
sector with regards to its transportation problems (Enbridge pipeline
connecting U.S. with Canadian supplies, shut down for eight days in
September which accounts for nearly a third of Canadian oil exports),
have largely been rectified and the bottleneck should clear up,” Hall
added.

“Industry data on the auto sector show about three to four North
American models not having an overall bad year and there is some decent
volume going through, which could help pick up the auto sector exports
which have were hit pretty hard the last couple of reports,” Hall added.

“There was a massive plunge in copper exports in September’s report
and it seems to have overshot and we should see a rebound in this
sector,” Hall added. “The potential for the bounce back is sizeable,”
Hall said.

** Market News International Ottawa **

[TOPICS: M$C$$$, MAUDS$]