CA: Merchandise Trade

Tue Jul 07 07:30:00 CDT 2015

Consensus Actual Previous Revised
Level C$-2.5B C$-3.34B C$-2.97B C$-2.99B
Imports-M/M 0.2% -2.5%
Imports-Y/Y 2.0% 4.1%
Exports-M/M -0.6% -0.7%
Exports-Y/Y -6.7% -3.1%

The red ink on merchandise trade was again substantial in May. At C$3.34 billion the deficit was up from a marginally upwardly revised C$2.99 billion in April and significantly larger than expected.

The headline deterioration reflected a 0.6 percent monthly decline in exports, their fifth fall in a row, and a 0.2 percent rise in imports. Sales into the key U.S. market dipped 0.3 percent which, with purchases from across the border 0.5 percent higher, saw the bilateral surplus narrow to C$2.12 billion from C$2.34 billion last time.

At the same time the real trade position also worsened as exports volumes dropped some 2.5 percent on the month and price adjusted imports gained 0.3 percent.

Within the monthly slide in total nominal exports the main areas of weakness were electronics and electrical parts (minus 4.8 percent) and industrial machinery, equipment and parts (minus 3.5 percent) alongside metal ores and non-metallic minerals (minus 9.2 percent) and metal and non-metallic mineral products (minus 5.8 percent). However, aircraft and equipment rose 10.3 percent and motor vehicles and parts advanced 2.7 percent.

Nominal imports were hit by aircraft and equipment (minus 12.4 percent), metal ores and non-metallic minerals (minus 10.9 percent) and industrial machinery, equipment and parts (minus 5.0 percent) but most other subsectors saw gains.

Following a useful improvement in the real trade position in April the May deterioration raises doubts about a possible positive contribution from net exports to real GDP growth last quarter. As such today's data increase the risk of a return to recession and a looser BoC policy stance. This is not good news for 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.