Canadian Trade Deficit Widens Sharply in December Dealing Another Blow to the Loonie

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December trade data adds to a downbeat outlook for the Canadian currency, which comes as global markets are still reeling from a sudden spike in volatility during the overnight and London sessions.

Canada’s trade deficit widened sharply during the month of December, catching economists by surprise and dealing another blow to a currency that has been under pressure from a rout in risk assets.

The trade balance, which measures the difference between a nation’s imports of goods and its exports, showed Canada’s deficit widening to -$3.2 billion for the December month.

This marks a deterioration from the already-wide $-2.5 billion deficit seen in December and is substantially larger than the -$2.3 billion deficit expected by economists.

December’s deficit was the result of a 0.6% rise in exports proving insufficient enough to offset a 1.5% increase in imports, the latter of which owes itself to a surge in demand for energy products and industrial machinery.

Canada imported $3 billion of crude oil and crude oil bitumen during the month, up 16.9% on their November level, while machinery imports rose 6.3% to $5 billion.

“That's toward the extremes of 2017 and reason we've been persistent bears on the Canadian Dollar. The mixed picture for real exports is disappointing given what have been signs of firm US import demand,” says Nick Exarhos, an economist at CIBC Capital Markets.

“Indeed, the US trade balance came in a bit wider than expected at US$53.1bn (street was at US$52.1bn) with total imports up by a second consecutive 2.5%, good enough for nearly a 10% increase on the year.”

This more than offset the effect of a reversal in a prior surge of aircraft and transport equipment imports, which had driven the trade deficit wider back in November.

The USD/CAD rate was quoted 0.10% higher at 1.2545 shortly after the release, reflecting a mild weakening of the Canadian Dollar, although the Pound-to-Canadian-Dollar exchange rate was marked 0.59% lower at 1.7376.

“The synchronized nature of the sell-off will continue to feed into risk-sensitive currencies like CAD. Given the spike in volatility, the decline in stocks and the fall in oil, we look for another pusher higher in USDCAD, setting up a test of 1.2660,” writes Mark McCormick, North American head of FX strategy at TD Securities.

The downbeat outlook for the Canadian currency comes as global markets are still reeling from a sudden spike in volatility during the overnight and London session Tuesday.

This was best witnessed through price action in stock markets where both the S&P 500 and Japan’s NIKKEI index fell by more than 4% overnight, while London’s commodity and financials heavy FTSE 100 has dropped more than 5% over the course of the last week.

Such was the severity of the sell off that the CBOE VIX index, which measures volatility on the S&P 500 and is widely described as a “fear index”, rose more than 150% to 44.19 in a single session.

This marked the highest level for the VIX since the very pinnacle of the Eurozone sovereign debt crisis.

The financial market tantrum has its roots in last Friday’s US jobs report, which saw the Bureau of Labor Statistics announced that the US economy added more than 200,000 new jobs in January and that wages grew on average by 2.9%.

This was the first time since August 2016 that jobs and wage growth beat expectations simultaneously and has been credited with delivering a sudden surge in expectations of a rise in inflation later during the months ahead.

Those numbers saw markets panicking that the Federal Reserve may soon need to raise interest rates faster than previously thought, which pushed the 10 Year US Treasury yield above 2.8% on Friday for the first time since taper tantrum of 2013.

As a consequence, the US Dollar received a boost across the board, which crushed commodity prices and commodity currencies like the Canadian Dollar.

“It is the G10 low yielders that outperform in the current regime while G10 commodity currencies suffer both via the general risk channel and falling commodity prices,” says Petr Krpata, a strategist at ING Group.

“While one could argue that the correction in equity markets was long overdue, in our view the playing field has not changed dramatically to the extent that it warrants a long-lasting and persistent risk asset sell-off.”

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