A combination of lower exports and higher imports led to an unexpected C$3.439 billion merchandise trade deficit in May, the largest since October 2020. Econoday's consensus was for a C$1.2 billion surplus. April's surplus was revised down to C$0.9 billion from C$1.9 billion.

Exports retreated 3.8 percent on the month, for a 2.5 percent contraction in both currency and volume terms. Energy exports fell 7.3 percent from April, much of it owing to lower prices. Farm, fishing and intermediate food products fell 13.4 percent. The agency noted that demand for Canadian grains slowed in recent months as global supply improved, leading to lower prices that pushed producers to wait for better market conditions. Together, these two sections accounted for two-thirds of the total export decline, although 7 of 11 categories were down on the month.

Meanwhile, imports increased 3.0 percent in currency terms on the month, led by higher activity as volumes were up 3.5 percent. Silver, gold, and motor vehicles and parts contributed the most to import gains: metal and non-metallic mineral products rose 12.3 percent, led by gold and silver, and motor vehicles and parts were up 4.5 percent to a record high C$11.3 billion. Overall, imports increased in 8 of 11 categories on the month.

Regionally, the trade surplus with the US narrowed to C$6.7 billion from $C8.7 billion, the smallest surplus since May 2021. Exports fell 2.9 percent and imports increased 1.3 percent.

Meanwhile, the trade deficit with countries other than the US deteriorated to C$10.2 billion from C$7.8 billion.

May's trade balance is seen in surplus of C$1.2 billion versus April's surplus of C$1.939 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.