27 February 2009

Current account deficit likely

The following is excerpted from today's edition of "globeandmail.com".

The Canadian dollar has been knocked down and today's release of the current account balance will be a good measure of the underlying economic problems the currency faces.

There are reasons for some optimism. Oil prices have recently shown remarkable resilience in the face of the global recession and some believe investors' flight to the safety of the U.S. dollar must one day end. Just not yet, analysts say.

So what is expected?

Today, the current account balance - which measures international transactions in goods, services and investment income - is forecast to swing to a $5.1-billion deficit in the fourth quarter, compared with a surplus of $5.6-billion the previous quarter. It would be the first balance of payments deficit since the first half of 1999. The collapse reflects the first trade deficit in goods in more than 30 years, along with weakness in services and investment income.

"We would note that Canada recorded only four years of current account surpluses from 1950 to 1998, so deficits are hardly a black-swan event in this country," said Douglas Porter, deputy chief economist with BMO Nesbitt Burns Inc.

The currency and bond markets will be shaken up once there are signs the U.S. economy is recovering, said Rudy Narvas, a currency and fixed-income strategist... As for now, he expects the U.S. dollar will remain strong.

"From a global perspective, in the near term there will be a flight to safety, but it will capitulate once it seems the U.S. economy is coming out of a recession," Mr. Narvas said.

Another factor keeping the greenback firm is the continued demand for U.S. Treasuries, as evidenced by this week's auctions, Mr. Narvas said. "In the past few Treasury auctions, there has been a concern over a lack of demand, but people have been showing up for the auctions." It is in the best interest of China and other foreign entities to buy U.S. Treasuries, he added.

Meanwhile, commodity prices will be a drag on the loonie, Mr. Narvas said.

The surge in oil prices to $45.22 (U.S.) from $38 a week ago has given the Canadian dollar only a modest lift. The loonie traded yesterday at about 79.8 cents...