Canada's merchandise trade surprised on the upside in January, starting the year with a C$1.92 billion surplus, the largest since June 2022, following a C$1.19 billion surplus in December. Econoday's consensus was for a C$0.1 billion gap.

Trade activity picked up in January, with imports rebounding 3.1 percent after declining 1.6 percent the previous month, and exports rising an even stronger 4.2 percent after 0.3 percent in December, the largest gain since March 2022. Export volumes were up 5.3 percent and import volumes up 4.1 percent.

Increases in exports were widespread, with farm, fishing and intermediate food products (11.9 percent), motor vehicles and parts (8.2 percent), and metal and non-metallic mineral products (8.3 percent) accounting for more than two-thirds of the gain in total exports. Energy was the only major category to post a decline on the month, as it was down 1.8 percent. If not for energy, exports would have been up 6.1 percent to a record high C$51.6 billion.

On the import front, 6 of 11 categories increased, with motor vehicles and parts rising 11.1 percent after 7.2 in December, reaching a record high level of C$11.0 billion. Imports of industrial machinery, equipment and parts advanced 10.0 percent in January. The latter category has been rather volatile since the beginning of 2022, reflecting variations in"high-value" deliveries related to the construction of a new liquefied natural gas terminal in British Columbia. Also of note, consumer goods imports rebounded 3.8 percent despite recession fears and higher interest rates. Consumer goods imports were still up more than 3 percent when excluding pharmaceutical products.

Regionally, the trade surplus with the United States widened to C$9.0 billion from C$8.4 billion, and the trade deficit with countries other than the US narrowed C$7.1 billion from C$7.2 billion.

A marginal surplus of C$0.1 billion is expected in January to extend flat readings to a fourth month.

The merchandise trade balance measures the difference between imports and exports of goods. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade and can offer a guide to an economy's competitiveness. Nominal data are supplied with regards to principal trading partners and product classification.

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.