Canadian Dollar Temporarily Declines Despite Current Account Deficit Narrowed in the Third Quarter

THE TAKEAWAY: Canadian Current Account Deficit Narrowed in the Third Quarter> Traded Goods Swung to Surplus > Canadian Dollar Temporarily Declined

Canadian current account deficit narrowed in the third quarter as traded goods swung to surplus, Statistics Canada reported today. Third-quarter current account deficit in the third quarter shrunk $4.0 billion to $12.1 billion on a seasonally adjusted basis from C$16.1 billion deficit in the second quarter. However, the reading missed consensus prediction from Bloomberg survey as economists widely expected a deficit of merely $11.1 billion. Second-quarter deficit was revised to C$16.1 billion from C$15.1 billion. Canadian current account keeps being shortfall since the fourth quarter of 2008 as Canadian currency depreciation have added more pressure on the nation’s exporting activities.

Canadian Quarterly Current Account: January 2010 to Present

Prepared by Trang Nguyen

Traded goods returned to a surplus of $0.73 billion from a deficit of $3.5 billion in the second quarter as export of goods soared $4.7 billion to 115.2 billion, the highest level since the third quarter of 2008. Besides, the deficit in services in the third quarter narrowed to C$6.35 billion from C$6.54 billion in the previous quarter due to contractions in travel and transportation deficits. On the contrary, investment income deficit widened to $5.89 billion from $5.48 billion because foreign investment in Canadian securities continued to mount, led by inflows to money market instruments while Canadians kept reducing their holdings of foreign debt securities. Also, direct investment gap extended since foreign direct investment to Canada fell to lowest investment since the third quarter of 2010.

USD/CAD 1-minute Chart: November 29, 2011

Charts created using Strategy Trader– Prepared by Trang Nguyen

The Canadian dollar has strengthened against Japanese Yen, Euro and U.S. dollar in the North America trading session today. However, the loonie pared gain versus the greenback thirty minute before and after the report release. As can be seen from the 1-minute USDCAD chart above, the loonie lose its footings following the report. The currency pair rose approximately 30 pips from 1.0290 to 1.0320. The Relative Strength Indicator crossing above 70 to the overbought territory signaled that foreign exchange trading crowd was massively buying the greenback while selling the loonie. At the time this report was written, a U.S. dollar traded at 1.03123 Canadian dollars. Regardless, the USD/CAD rebound would be short-lived. As Canada is the seventh-largest producer of crude oil in the world, its currency has strongly correlated to crude oil price, and rising oil price today might send the loonie higher during the trading session.

--- Written by Trang Nguyen, DailyFX Research Team for DailyFX.com

To contact Trang, email tnguyen@dailyfx.com