Canada’s trade surplus narrowed 3.5% in January from December, but exports and imports both fell, surprising analysts and raising the likelihood of another interest rate cut next month.

Statistics Canada said the trade surplus was in line with analysts forecasts at C$5.23 billion ($3.96 billion) in January from December’s C$5.42 billion surplus, but shrinking exports and imports caught the market by surprise.

“The shocker here was that both exports and imports tumbled in the month, we were looking for a bit of a pullback from strong December results, but nothing close to the 4.7 percent drop in exports and the five percent sag in imports,” BMO Nesbitt Burns’ Sherry Cooper said.

“The (central) bank will not see another trade report before they decide on rates in April, and this one is troubling.”

Auto exports fell for the third time in four months, Statscan said, attributing more than half of the decline in exports and over a third of the fall in imports to that one sector alone.

“Exports have declined in seven of the last 10 months, and the 4.7% drop from December was the largest in nine months,” Statscan said. January’s exports fell to C$31.85 billion from December’s C$33.43 billion.

January imports fell to the lowest level since June 1999, C$26.61 billion from December’s C$28.01 billion, it said.

Two weeks ago, the Bank of Canada cut interest rates to support demand - which it said was slightly weaker than expected at home but slightly stronger abroad - so the latest trade figures add to the likelihood of another cut in April.

“Obviously, these numbers don’t augur well for growth,” Toronto-Dominion Bank’s Marc Levesque said. “These are horrible numbers. There’s not a single positive element in this report.”

Auto exports, which were very volatile in the second half of 2003, fell more than 10% in three of the last four months because of consumer uncertainty in the market.

Statscan said machinery and equipment exports fell 5.5% from December although strong aircraft exports partly offset the decline.

Auto plus machinery and equipment exports combined account for more than 40% of all Canadian merchandise exports. ($1=$1.32 Canadian) (Reuters)