Canada's merchandise trade deficit widened to C$5.9 billion in June, a larger gap than the C$5.7 billion deficit expected by forecasters in an Econoday survey as import growth outpaced export gains. However, a one-time high-value shipment overshadowed an otherwise weaker import picture.

Exports increased 0.9 percent on the month, but were down 5.9 percent from a year earlier. Over the month, exports increased in 6 of 11 categories, with higher prices contributing noticeably as export volumes were down 0.4 percent from May. Energy, the largest contributor to the monthly gain, was up 3.8 percent, as higher prices boosted crude exports. A 6.7 percent gain in farm, fishing and intermediate food products also contributed to higher monthly exports.

On the downside, metal and non-metallic mineral products were down 3.4 percent. Coinciding with higher U.S. tariffs on Canadian steel and aluminum, exports of unwrought aluminum fell 11.3 percent and exports of iron and steel were down products 11.4 percent. Also of note, exports of passenger cars and trucks dropped 8.9 percent, marking their third consecutive decline amid slower Canadian auto production.

Imports were up 1.4 percent in June, increasing for the first time in four months due to a 27.7 percent surge in imports of industrial machine, equipment and parts. The jump was tied a C$2.0 billion shipment in the logging, construction, mining, and oil and gas field machinery and equipment product group. Excluding this category, imports actually contracted 1.9 percent. Statistics Canada cited the import of a module destined for an oil project off the coast of Newfoundland.

Overall import gains were in concentrated in just 5 of 11 subsectors, with volumes up 1.5 percent on the month. Motor vehicles and parts rose 2.9 percent, while consumer goods imports declined 4.8 percent.

On a quarterly basis, exports declined 12.8 percent in the second quarter while imports contracted 3.9 percent, leading to a record trade deficit of C$19.0 billion, widening from C$388 million in the first quarter, when exports rose 4.2 percent to reach a record high.

The Bank of Canada is already factoring in a weaker trade picture in the second quarter under its different scenarios. Under a current scenario, Canada and China retaliatory tariffs are assumed to be permanent, while other countries are assumed to not retaliate, fostering high uncertainty into next year. GDP is projected to decline about 1.5 percent in the second quarter,"mostly due to a sharp reversal in exports" following a pull-forward in the first quarter ahead of tariffs. The central bank also expects lower U.S. demand for Canadian goods to weigh on exports due to tariffs. Under the escalation scenario, where tariffs intensify, export growth contracts into the middle of 2026. The most recent developments have gone in the escalation direction even as Canada's minister responsible for Canada-U.S. trade cites constructive discussions with the U.S. The Trump administration increased its tariffs just last week for goods not covered by the United States-Mexico-Canada Agreement.

In June, exports to the U.S. rose 3.1 percent in June, while imports increased 2.6 percent, leading to a trade surplus of C$3.9 billion, up from C$3.6 billion in May. Meanwhile, Canada's trade deficit with other countries widened to C$9.8 billion from C$9.1 billion.

When including services, Canada's total trade deficit with the world widened to to C$6.5 billion in June from C$6.4 billion in May.

After a C$5.9 billion deficit in May, a C$5.7 deficit is the call for June.

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.