The Canadian current account surplus narrowed dramatically in the third quarter, although this had been expected by economists.

The current account surplus narrowed to an annualized $22.1 billion (or $5.5 billion before adjustment) in Q3. This is down sharply from from the prior quarter’s $36 billion surplus.

But, BMO Nesbitt Burns says it would have been considered a strong showing as recently as two years ago. “The average quarterly surplus since 1999 is $6.4 billion, and there were only two years of surplus from 1980 to 1998.”

BMO says that it was inevitable that the surplus would recede as U.S. import demand cooled and as energy prices faded. Most of the slide was due to a decline in the merchandise trade surplus.

CIBC World Markets says, “Today’s worse-than-expected report provides more clear evidence that the party is over on the current account side. Although the weak domestic economy will provide some support by dampening import demand, that is unlikely to prevent further erosion in the next 2-3 quarters as the U.S. struggles to cast off the yoke of recession and the sharpest slowdown in the global economy in two decades hammers Canada’s major commodity exports. We expect it will be mid-2002 before the current account begins to show meaningful signs of a turnaround.”

CIBC says that the current account surplus and weak GDP report do not bode well for the Canadian dollar’s near-term prospects. But BMO says that the fact that Canada is still running a current account surplus at all with the U.S. now in recession and commodity prices hobbled is strong evidence that the Canadian dollar is fundamentally undervalued.

“Expect a further narrowing in the current account surplus in Q4. However, it looks like 2001 will be another record year for the surplus, coming in around $30 billion,” concludes BMO.