Canadian trade deficit narrows in January

Trade deficit of Canada narrowed in the month of January. The trade deficit narrowed to CAD 1.9 billion from CAD 3.1 billion. Imports dropped 4.3 percent, owing to declines in industrial machinery, equipment, and parts, while exports fell 2.1 percent, due to falls in the export of passenger cars and light trucks. In real or volume terms, exports fell 3.6 percent, while imports dropped 3.9 percent.

After two straight months of solid rises, imports of industrial machinery, equipment and parts dropped 11.3 percent in January. Moreover, the import of logging, mining, and construction machinery and equipment dropped 40 percent. Statistics Canada showed that part of the January decline in imports was possibly related to new regulations on off-road diesel engine and machine emissions that took effect at the beginning of January, which likely restricted imports to machinery that met the new standards.

Following three straight monthly gains, exports dropped in January. In spite of a sixth straight, price-driven rise in exports of energy products, declines in passenger cars and light trucks and forestry products and building and packaging materials aided in weighing down the headline figure. According to Statistics Canada, that atypical plant closures in January were responsible for the fall in imports of motor vehicle engines and parts, while the resumption of the collection of import duties by the U.S. Department of Commerce likely added to the decline in export of forestry related products.

The trade data for January was disappointing, with both export and import volumes falling. While the fall in import volumes was anticipated after a solid performance in the earlier months, the trend of subdued export numbers pours cold water on the notion that the Canadian economy is rotating away from consumption and housing toward investment and trade, noted TD Economics. However, some of the weakness in exports is because of temporary factors that should reverse in months ahead and given the volatility in the month-to-month trade data, exports could very well strengthen through the first quarter.

Stronger demand from the U.S. and a sub-80 US cent loonie should provide some support for Canadian exports. But NAFTA renegotiations pose some risk, and new protectionist rhetoric from the U.S. administration concerning steel and aluminum tariffs only serves to further elevate trade uncertainty.

“Given the elevated level of policy uncertainty emanating from the U.S. administration and slowing economic momentum in Canada, the Bank is likely to leave its policy rate unchanged”, added TD Economics.

At 18:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was slightly bearish at -60.2424, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -43.431. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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