CA: Merchandise Trade

Wed Jan 07 07:30:00 CST 2015

Consensus Actual Previous Revised
Level C$-0.20B C$-0.64B C$0.10B C$-0.33B
Imports-M/M -2.7% 0.5%
Imports-Y/Y 6.2% 10.0%
Exports-M/M -3.5% 0.1%
Exports-Y/Y 8.4% 11.5%

Following a revised deficit of C$0.33 billion in October, November saw the merchandise trade shortfall widen out to a surprisingly large C$0.64 billion in November.

The real trade balance was little changed as export volumes were down 1.6 percent from the start of the quarter, much in line with the 1.7 percent slide posted by real imports.

The nominal deterioration in the headline reflected a 3.5 percent monthly drop in exports that more than offset a 2.7 percent decline in imports. Net trade with the U.S. was also worse off as exports contracted a monthly 2.6 percent and purchases from across the border shrank 2.1 percent. As a result, the bilateral black ink fell from C$3.2 billion to C$2.9 billion.

Within the monthly fall in total cash exports energy was off fully 7.8 percent, mainly due to weaker prices. Metal and non-metallic mineral products also slumped 8.3 percent and metal ores and non-metallic minerals dropped an even steeper 11.5 percent. Other key areas of weakness were industrial machinery, equipment and parts (minus 3.5 percent) and electronic and electrical equipment and parts (minus 2.9 percent). The best performing subsectors were farm, fishing and intermediate food products (8.2 percent) and basic and industrial chemical, plastic and rubber products (4.8 percent).

Most import categories also suffered monthly reversals, notably metal ores and non-metallic minerals (12.6 percent) and aircraft and other transportation equipment and parts (18.7 percent). Energy was down just 2.7 percent.

The drop in export volumes bodes poorly for total output in mid-quarter. However, GDP growth surprised on the upside in October and a much better feel of how the overall fourth quarter economy shaped up should be available after Friday's December employment data. Meantime, expect the slump in oil prices to push the nominal trade balance further into the red over coming months to the ongoing detriment of the local currency.

Merchandise trade balance measures the difference between imports and exports of both tangible goods and services. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade.

Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect currency values in foreign exchange markets. This is particularly true for Canada which relies on exports and particularly those to the U.S. for growth. It should be noted that this report focuses solely on goods trade - it leaves services trade for the quarterly national accounts and balance of payments reports.

Imports indicate demand for foreign goods while exports show the demand for Canadian goods in the U.S. and elsewhere. The Canadian dollar is particularly sensitive to changes in its trade balance with the U.S. For the most part, Canada's trade balance is in surplus thanks to its exports to the U.S. Both the nominal export and import values are split into volume (real) and price components. This permits trade data to be analyzed for both changes in trade patterns as well as changing prices. This has been particularly important of late given energy price volatility and the impact on Canada's merchandise shipments. A word of caution -- the data are subject to large monthly revisions. Therefore, it can be misleading to form opinions on the basis of one month's data.

The bond market is sensitive to the risk of importing inflation. This report gives a breakdown of trade with major countries so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.