OTTAWA (Reuters) - Canada's trade gap widened in June as a drop in energy shipments pulled exports back from a record high, but sustained employment growth in July kept expectations alive for another interest rate hike in the coming months.
The trade gap was C$3.6 billion ($2.9 billion), Statistics Canada said on Friday. That exceeded forecasts of a C$1.35 billion deficit.
Exports tumbled 4.3 percent, the largest decrease since February 2016, as both prices and volumes fell. The drop was widespread, led by a decrease in metal products, crude oil and bitumen.
The decrease in oil shipments led to a 4.5 percent decline in exports to the United States, Canada's largest trading partner. Canada's trade surplus with the United States shrank to C$2.17 billion, the smallest since June 2016.
The disappointing trade figures come as the Canadian dollar has risen 8 percent since early May due to a hawkish shift and interest rate increase from the Bank of Canada. A higher loonie makes Canada's exporters less competitive.
While the central bank could raise rates in October, expectations of a U.S. Federal Reserve increase in December will need to be priced into the market to ensure the Canadian currency does not get too strong, said CIBC Capital Markets Chief Economist Avery Shenfeld.
"The Bank of Canada can't afford to outgun the Fed on rate hikes without jeopardizing export growth by sending the Canadian dollar through the roof," Shenfeld said.
The central bank raised rates last month for the first time in seven years amid the improving jobs picture and signs that the economy had recovered from 2015's oil price shock.
The Canadian dollar weakened against the greenback following Friday's data and stronger-than-expected U.S. job figures.
Economists said the trade report from Canada was tempered by an increase of 10,900 jobs there in July. The nation's labor market has picked up in the past year, adding 387,600 jobs, including 353,500 full-time positions.
"The ongoing strength in the labor market suggests the Bank of Canada is on track to raise interest rates at least one more time this year, probably in October," said BMO Capital Markets Senior Economist Sal Guatieri.
Markets slightly trimmed their bets for another hike after the data, although traders are still pricing in 38 percent odds of an increase at the bank's next meeting in September.
Many economists think the appreciation in the Canadian dollar and weak inflation will prompt the central bank to wait until October to hike again. Market odds for an October move are at 64 percent. BOCWATCH
Fewer people looking for work pushed the Canadian unemployment rate down to 6.3 percent, the lowest since October 2008, when the global financial crisis was taking hold.
Additional reporting by Susan Taylor and Alastair Sharp in Toronto; Editing by Bill Trott and Lisa Von Ahn