By James Langton

(February 28 – 11:40 ET) – A large current account surplus could be short-lived economists warn, with the Canadian dollar suffering as the surplus erodes.

This morning, Canada’s current account surplus was reported at a record high in the fourth quarter and for the year as a whole. For the year as a whole, the surplus totalled $18.9 billion, coming off a small deficit in 1999. This is only the third surplus in the last 20 years.

But BMO Nesbitt Burns observes the strength may be fleeting. “Foreign direct investment into Canada hit record territory in Q4, largely due to the Vivendi’s purchase of Seagram. Outside of this one-time inflow, however, the story was not very supportive. Foreigners dumped both domestic debt securities and equities for the first time in nearly two years. Canadian investor appetite for foreign securities continued unabated, with a $20.5 billion outflow headed straight for overseas stocks.”

BMO Nesbitt Burns notes that the surplus is expected to shrink as U.S. demand dwindles. CIBC World Markets agrees, noting, “As we warned a quarter ago, Canada’s improved current account balance could prove fleeting in the face of a decelerating U.S. economy. Look for the current account surplus to lose a lot of its shine throughout 2001.”

In the meantime, BMO Nesbitt Burns says, “These results drive home the point that Canada’s trade position is exceptionally strong, in no small part due to a fundamentally cheap currency.”

That currency may only get cheaper though, says CIBC World Markets. “Longer-term, a gradual decline in the current account is far from bullish for the Canadian dollar, which combined with aggressive Bank of Canada easing could see the beleaguered currency test the 60¢ threshold by year-end.”