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Soaring natural gas prices helped propel Canada's trade surplus unexpectedly to the fifth highest on record in September, boosting expectations of strong economic growth and continued interest rate hikes.

Statistics Canada said on Thursday the surplus rose to C$7.02 billion ($5.90 billion) from C$6.38 billion in August, itself sharply revised up from C$5.67 billion.

"The value of Canada's exports and imports both hit record highs in September, thanks to soaring outbound shipments of natural gas and inbound shipments of crude petroleum in the wake of back-to-back hurricanes," the government agency said.

At least two banks, J.P. Morgan and National Bank of Canada, boosted their forecasts for growth for the third quarter to an annualised 4 percent or more, well above the Bank of Canada's steady-state forecast of 3 percent.

"Canada's trade balance is still holding up, even in the manufacturing sector, as the economy adjusts to the higher Canadian dollar," BMO Nesbitt Burns' Sherry Cooper said.

"The Bank of Canada will take this surprisingly strong report, on the back of the surprising strong jobs report, as a sign that they are on the right path and will continue to raise rates."

The central bank next sets rates on December 6. It hiked them in September and October and signalled they still needed to rise a little more.

Royal Bank of Canada backed the consensus that rates would rise further but also noted that the strong Canadian numbers and record US trade deficit would likely mean upward pressure on the Canadian dollar.

"The Bank of Canada needs to tread carefully on this count, continuing with a measured approach to monetary policy that is sensitive to risks of a greater than anticipated drag from an appreciating Canadian dollar," economist Derek Holt said.

Immediately after the data's release, the Canadian dollar jumped to C$1.1804 to the US dollar (or 84.72 US cents) from C$1.1880, but then fell back to C$1.1868 (84.26 US cents) in tandem with lower oil prices.

A 25.0 percent jump in natural gas prices accounted for almost all the 26.7 percent rise in the value of gas shipments to C$4.2 billion. Three-quarters of September's increase in overall exports was due to higher natural gas prices.

Crude oil imports also rose to a record C$2.2 billion - one-third of the increase being due to higher prices.

The trade surplus with the United States jumped to C$10.74 billion, the second highest ever, from C$9.42 billion, as exports surged 3.8 percent and imports from the United States fell 0.6 percent. A subsequent retreat in energy prices may reduce future surpluses but economists predicted continued strength, even if they do not repeat a C$7 billion number.

Copyright Reuters, 2005


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