Canada's merchandise trade surplus narrowed more than expected in February, to C$422 million, from a downwardly revised C$1.20 billion in January amid weakening international trade activity as both imports and exports contracted. Econoday's consensus was for a C$0.6 billion surplus.

Exports fell 2.4 percent on the month, with declines across the board: aircraft and other transportation equipment and parts contracted 14.9 percent, motor vehicles and parts were down 4.4 percent, consumer goods 1.6 percent and energy 0.8 percent.

Imports were down 1.3 percent on the month. Gains in consumer goods (6.9 percent) and metal ores and non-metallic minerals (10.3 percent) were not enough to offset contractions of 8.8 percent in aircraft and other transportation equipment and parts, 5.3 percent in motor vehicles and parts, 8.7 percent in industrial machinery, equipment and parts, and 4.9 percent in energy.

Regionally, the trade surplus with the United States widened to C$9.3 billion from C$8.6 billion, and the trade deficit with countries other than the US widened C$7.4 billion from C$8.9 billion.

February's trade balance is seen in surplus of C$0.6 billion versus a higher-than-expected January surplus of C$1.9 billion.

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.