CA: Merchandise Trade

Fri Dec 04 07:30:00 CST 2015

Consensus Actual Previous Revised
Level C$-1.7B C$-2.76B C$-1.73B C$-2.32B
Imports-M/M -0.8% -1.3%
Imports-Y/Y 1.5% 3.5%
Exports-M/M -1.8% 0.7%
Exports-Y/Y -3.5% -0.7%

The merchandise trade balance returned a deficit of C$2.76 billion in October, up from a larger revised C$2.32 billion shortfall in September. The red ink was easily at the high end of market expectations.

The headline deterioration reflected a 1.8 percent monthly fall in exports that more than offset a 0.8 percent decline in imports. The real trade balance moved in the same direction as export volumes dropped 1.5 percent from September while imports slipped just 0.2 percent.

Within the nominal fall in total exports, sales to the key U.S. market were down 2.8 percent on the month. With imports only 0.3 percent lower, the bilateral surplus narrowed from C$2.41 billion to C$1.58 billion.

Overall cash exports were hit by widespread monthly declines amongst which metal ores and non-metallic minerals (9.4 percent) and basic and industrial chemical, plastic and rubber products (5.6 percent) stood out. Energy was flat. Imports were more mixed with decent gains in metal ores and non-metallic minerals (9.0 percent) and metal and non-metallic mineral products (3.6 percent) contrasting with falls in energy (6.8 percent) and electronics (3.1 percent).

Net exports boosted quarterly GDP growth by a full 1 percentage point in the period just ended but the worsening in October's real trade balance bodes ill for the start of the current quarter. C$ weakness is clearly having a beneficial effect but overseas demand is not as strong as it could be. Certainly sustained contributions of this order of magnitude cannot be relied upon and domestic demand will need to provide more of a lift going forwards if the economy is not to lose momentum.

The BoC already sees growth slowing to 1.5 percent (saar) this quarter but risks at this stage are probably on the downside.

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.