CA: Merchandise Trade

Wed Aug 05 07:30:00 CDT 2015

Consensus Actual Previous Revised
Level C$-2.8B C$-0.48B C$-3.34B C$-3.37B
Imports-M/M -0.6% 0.2%
Imports-Y/Y 4.4% 2.0%
Exports-M/M 6.3% -0.6%
Exports-Y/Y -1.0% -6.7%

The trade balance returned a deficit of just C$0.48 billion in June, a huge improvement on May's marginally larger revised C$3.37 billion shortfall. The red ink was well short of market expectations and the smallest since November 2014.

June's turnaround reflected a 6.3 percent monthly rise in exports, their first since last December, and, to a much lesser extent, a 0.6 percent drop in imports. Sales to the U.S. were up fully 7.1 percent versus May and with domestic purchases from across the border 0.9 percent weaker, the bilateral surplus with the U.S. widened from C$2.15 billion to some C$4.69 billion.

Prices once again were quite volatile but even adjusted for these, overall export volumes rose 4.8 percent which, with imports down 0.9 percent, pointed to a sizeable improvement in the real trade balance too.

The narrowing in the overall nominal shortfall was led by a 17.2 percent monthly surge in exports of consumer goods alongside a 13.5 percent leap in metal ores and non-metallic minerals and a 10.8 percent jump in metal and non-metallic mineral products. However, most categories were robust and energy was up 3.7 percent. On the import side, a 10.4 percent drop in energy and a 19.0 percent slide in aircraft and other transportation equipment and parts did most of the damage.

Having seen real GDP contract for a fifth consecutive month in May, the dramatic improvement in the real trade balance will not prevent the Canadian economy from falling into technical recession last quarter. However, it does reduce the potential magnitude of the expected contraction in total output. A major undershoot of the BoC's minus 1.5 percent (saar) quarterly growth call is now much less likely. That said, prospects for the current period have not been improved by the uncertainty caused by PM Harper's decision earlier this week to call a general election for 19th October.

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.