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Traffic makes its way to the Ambassador Bridge connecting Canada and the U.S. in Windsor, Ont. Canada’s export outlook was given a boost by increases in U.S. shipments of capital goods in June and July.

MARK SPOWART/THE CANADIAN PRESS

The divergent fates of the Canadian and U.S. economies sent Canada's slipping currency to a six-month low against its U.S. counterpart, as Canada's burgeoning export recovery took an unexpected step backward while a bullish U.S. employment report lifted the market's U.S. dollar infatuation to new heights.

The Canadian dollar suffered one of its biggest one-day losses of the year, down eight-tenths of a cent to 88.80 cents (U.S.) on Friday, after Statistics Canada reported a surprise trade deficit of $610-million in August, a far cry from the $1.6-billion surplus economists had expected. Exports fell 2.5 per cent from July, a disappointing retreat after three straight months of solid gains that fuelled confidence in a long-overdue export turnaround and spurred hopes for accelerating economic growth.

The loonie selling was amplified by a flood of buying in the U.S. dollar, after a U.S. labour report showed that unemployment dropped to a post-recession low of 5.9 per cent in September. The greenback surged to a four-year high against a basket of major world currencies, adding to a bull run that has now added 9 per cent to the world's dominant currency over the past three months.

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"There's no sugar-coating the fact that the August trade report was sorely negative and, combined with the strong U.S. payrolls report, will do no favours for the Canadian dollar," said Bank of Montreal senior economist Robert Kavcic in a research note.

Canada's weak August trade number provides further cause for economists to trim their third-quarter economic growth estimates, on the heels of news this week that gross domestic product growth stalled in July. The prospect of slower growth supports the delayed timetable for interest-rate increases that the Bank of Canada has indicated it favours. That's bearish for the Canadian currency, because higher rates are a major attraction for currency investors.

But the big story in the forex market is an increasingly convincing U.S. recovery that has raised the prospect of the U.S. Federal Reserve raising its interest rates sooner than expected – and much sooner that central banks in other advanced economies, including Canada's, where recovery remains spotty and elusive. This has fed a buying frenzy in the greenback in recent months, at the expense of currencies.

"If economies were sports teams, there would be a roaring crowd in the U.S. cheering section. [Friday's] payrolls data were merely the latest evidence that America's team is marching down the field, while other global teams are nursing their wounds," said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, in a report.

While Canada's August trade result was disappointing, economists cautioned that a single soft month doesn't change the broader trend of improving Canadian trade. Prior to August's pullback, the economy had generated a cumulative trade surplus of $4.1-billion over the preceding three months, the hottest three-month streak since 2008. For the first eight months of the year, Canada recorded a cumulative surplus of $4.7-billion, a sharp reversal from the $5.3-billion deficit over the same period in 2013.

"It's a one-month blip in the story," said Stuart Bergman, assistant chief economist at Export Development Canada, the federal government's export credit agency. "For most sectors, the year-over-year and year-to-date numbers are still showing a positive trend."

A big contributor to August's export decline was the autos sector, which tumbled 11.2 per cent on the month – reversing a 10.7-per-cent surge in July. Economists attributed the volatility to quirks in Statscan's seasonal adjustments surrounding the timing of summer maintenance shutdowns. Energy products, the country's biggest export sector accounting for nearly one-quarter of all exports, dropped 5.8 per cent, mostly due to a decline in prices.

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Meanwhile, imports jumped 3.9 per cent from July, to a record $44.8-billion, led by mining and energy products. While the rise in imports contributed to the trade deficit, they also suggest improving domestic demand, an encouraging economic sign.

While Mr. Bergman suggested that the Canadian dollar's decline was a "market overreaction" to the trade data, he nevertheless said that a lower currency could put additional wind in the sails of Canada's exporters, by generally lowering the price of Canadian goods in foreign markets, especially for non-commodities exports. He said that overall, a 1-per-cent decline in the loonie typically translates, over time, to a 0.4-per-cent boost in Canadian GDP.

Mark Chandler, head of Canadian fixed-income and currency strategy at RBC Dominion Securities, said the Canadian dollar could trickle down toward 87 cents over the next few months, as the messages from the Canadian and U.S. central banks diverge further.

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