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Surprise Canada Trade Gap and Spending Drop Hurt Currency

Canada unexpectedly reported a return to large merchandise trade deficits and a decline in business investment, pushing the dollar to the weakest in three years and suggesting a transition away from consumer spending as the primary economic growth driver is further delayed.

The trade shortfall widened in November to C$940 million ($875 million) as imports of machinery and equipment increased, Statistics Canada said today in Ottawa. The deficit was nine times wider than the C$100-million median forecast in a Bloomberg News survey. Western University said its Ivey purchasing managers’ index fell to 46.3 in December, the lowest since May 2009. Economists had projected an increase from the November reading of 53.7.

“What we need to see is net exports and investment take the reins of growth in 2014,” said Mazen Issa, senior Canada macro strategist at TD Securities in Toronto. Until business spending picks up, the economy will be “hard pressed” to grow faster than 2 percent, which the Bank of Canada has said is needed to absorb spare capacity, Issa said.

Canada’s dollar extended losses after each report. Foreign trade remains a hindrance for the world’s 11th largest economy even as the country’s job market and consumer spending recover from the 2008-09 recession. Bank of Canada Governor Stephen Poloz said in an interview last month exports lagged through a period where the Canadian dollar weakened and the U.S. economy accelerated.

Three-Year Low

The nation’s dollar dropped 0.8 percent to C$1.0735 versus its U.S. counterpart at 11:38 a.m. in Toronto after touching C$1.0762, the weakest since May 2010. One dollar buys 93.15 U.S. cents.

Canada’s trade deficit exceeded all 15 forecasts in a Bloomberg economist survey that had C$500 million as the largest deficit estimate. Statistics Canada also revised its October figure to a C$908 million deficit from an earlier-reported surplus of C$75 million in a report today.

“The trade balance report re-enforces that growth imbalances are still quite dire,” Issa said.

Canada has posted 23 consecutive trade deficits, the longest streak in at least a quarter century. The October revision was led by a C$400 million reduction in crude oil exports due to a change in estimated prices.

Imports rose 0.1 percent to C$40.7 billion in November, led by an 8.5 percent gain in machinery and equipment purchases to C$3.94 billion, Statistics Canada said. Exports were little changed at C$39.8 billion.

U.S. Surplus

The volume of imports was also little changed, the agency said, while export volumes fell 0.7 percent. Volume figures adjust for price changes and can be a better indicator of how trade contributes to economic growth.

Canada’s trade surplus with the U.S. narrowed to C$2.75 billion in November from C$3.08 billion the prior month. The U.S. trade deficit shrank to $34.3 billion in November, the least since October 2009, figures from the Commerce Department showed today in Washington.

“We can’t manage growth in our overall exports to the U.S., so that’s pretty disappointing,” said Krishen Rangasamy, senior economist at National Bank Financial in Montreal. Exporters have lost market share in the U.S. and it will take time for the benefits of a weaker currency to develop, he said.

The supplier deliveries component of the Ivey index dropped to 43.9 in December, from 51.6 the prior month. That reading has averaged 48.0 over the past year.

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