Loonie strengthens despite wider deficit

The Canadian merchandise trade deficit expanded for a third consecutive month in December, as a jump in energy imports outstripped exports.

Canada’s merchandise trade deficit (a measure of goods in and out of the country that does not take into account services, capital transfers or foreign investments) increased in December, going from C$1.53 billion in November to C$1.66 billion in December (furthermore, the magnitude of November’s deficit was revised higher from the previously reported C$0.94 billion).

This was much wider than had been expected, with imports increasing 1.2% compared to a 0.9% rise in exports. Year-on-year imports (+7.1%) are far larger than exports (+2.9%), which is concerning for an export-driven economy like Canada. A 22.6% rise in energy imports lay behind the overall rise in imports.

The initial market reaction to this report was a sell-off in the Canadian dollar, with USD/CAD rising as high as 1.1124 earlier today. The Canadian dollar later strengthened, though, as a separate report showed the Ivey PMI, a measure of monthly changes in the dollar amount of purchases at business across the whole Canadian economy, returned to expansionary levels in January.

The Ivey PMI for January rose to 53.6, a big spike up from December’s reading of 40.2, suggesting that economic activity has bounced back since the New Year. USD/CAD dropped -0.21% by mid-afternoon in New York to 110.60.

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