Canada's goods balance returned to a larger-than-expected surplus of C$496 million in January after posting a C$863 million deficit in December amid lower trade activity. Imports contracted 3.8 percent and exports fell 1.7 percent.

Lower volumes explained the contraction in international exchanges, as real imports fell 4.1 percent and real exports decreased 1.8 percent.

At C$61.8 billion, imports reached their lowest level since February 2022, with declines in 7 of 11 product categories and across all 10 major countries.

Consumer goods imports were down 7.1 percent on the month, reversing most of the 9.8 percent surge in December, led by pharmaceutical products. Excluding that category, consumer goods imports would have been down 3.8 percent instead of 9.8 percent. Motor vehicles and parts decreased 5.2 percent, including a 10.3 percent drop in cars and light trucks amid lower global production as a result of plant retooling, supply issues, strikes and slowing demand. Metal and non-metallic mineral products were down 9.2 percent, dragged down by unwrought gold amid lower shipments of gold traded within the banking sector. On the upside, energy increased 3.6 percent.

Export weakness was also widespread across 8 of 11 categories. Metal and non-metallic mineral products dropped 6.2 percent, and aircraft and other transportation equipment fell 13.9 percent. Energy decreased 1.3 percent.

Regionally, trade activity with the US declined in both directions, resulting in a surplus rising to C$8.8 billion from C$8.6 billion. Canada's trade deficit with countries other than the US narrowed to C$8.3 billion from C$9.4 billion.

In services, exports fell 1.6 percent on the month while imports rose 1.5 percent.

The combined trade and services deficit with the world narrowed to C$0.8 billion from C$1.6 billion.

January's trade balance is seen in surplus of C$0.3 billion versus December's deficit of C$0.312 billion that saw exports fall 1.9 percent on the month tied in part to partial shutdowns of vehicle production.

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.