In a positive fundamental development for the Canadian economy and therefore for the Canadian dollar, the country’s trade surplus swelled to a three-year high of C$2.69 billion in December which was up from an upwardly revised C$1.17 billion surplus in November.

That beats expectations of a C$0.7 billion surplus for the month.

Breaking down the report we see that exports jumped 4.5% to C$42 billion while volumes rose 4.9%.

The gains in exports were led by machinery and equipment exports showing strong demand for capital goods.

On the import side Canadian households and companies increased their imports by 0.8% to C$39.3 billion on strong purchases of metals and autos.

This shows a combination of increase in raw materials needed for domestic production as well as stronger consumer demand for foreign cars, both positives.

Exports to the US – Canada’s main market – jumped 5.3% while imports climbed 2.8%. That resulted in a trade surplus with the US of C$5.5 billion in December, better than the C$4.7 billion in November.

This shows both that US customers are adding to Canada’s growth and that Canadian consumers, seeing their economy improving are spending more in the US as well.

Nomura changed their forecast for Canada’s 4th quarter growth to north of 3%, significantly above the 2% they expected prior to today’s strong trade report. Exports may add around 2 percentage points to growth in October through December.

Better Trade Should Have A Positive Impact on Loonie

A better trade balance will go a long way to solidifying Canada’s currency as an alternative to the Australian or New Zealand dollars when it comes to higher-yielding commodity and growth linked currencies, and should help to support the Canadian dollar during times of risk appetite against the USD, JPY, GBP, and EUR.

In today session the Canadian dollar was mainly pressured by week risk sentiment but following the trade balance report the USD/CAD found resistance at 1.0040 and was trading back near the parity level as of 10:30 AM Eastern.

The Canadian dollar also managed to pair earlier losses to the euro and pound, and saw a strong gain against the Australian dollar which was weak overnight due to its quarterly RBA report which lowered forecasts for growth and inflation.

Therefore while short-term risk sentiment is a negative, the positive trade report and the chance that it will continue to show strong export gains, can give us a positive fundamental factor for the Canadian dollar which can position the currency to be a strong performer in the first half of 2012.

That will be especially true if the general risk appetite tone we’ve seen in equity and commodity markets over the last month and a half can continue despite the Greek concerns.

For instance Goldman Sachs today lowered its three-month USD/CAD forecast a 0.99 from 1.03.

For a technical analysis look at the USD/CAD see today’s technical update: USD/CAD in a Bullish Breakout From Declining Channel

Also the upside risk for the CAD is going to continue to be dependent on the economic data coming out of the US, where the economic momentum has continued to show positive signs. That runs counter to the AUD and NZD where they are more closely tied to Chinese growth, which is showing deceleration.

Next week we have a couple of important releases from Canada including new vehicle sales, manufacturing sales, and inflation data.  Those reports should be key to gauging both domestic as well as price pressures. Stronger vehicle and manufacturing sales and higher inflation would help bolster the Canadian dollar next week while weaker sales and inflation would pressure Canada.

To gain free access to live market intelligence briefing which discuss key fundamental risk events as well as technical analysis and trade management, register here at IBTrade.

Nick Nasad is an analyst, educator, and trader; and one of the main contributors to  FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.