Canada's merchandise trade surplus contracted sharply in July, declining 82% to C$769 million from a revised C$4.2 billion in June. The figure came in well below the C$3.57 billion consensus estimate, according to Statistics Canada and a Reuters poll, missing by C$2.8 billion.
The unexpected drop was driven by a 2.3% decline in exports, which fell to C$76.1 billion, breaking a five-month streak of increases. Imports, meanwhile, climbed 2.2% to C$75.4 billion, marking the sixth consecutive monthly rise. The combination of weaker exports and stronger imports compressed the surplus to roughly one-fifth of June's level.
Energy exports led the decline, slipping 4.4% as crude oil shipments fell 5.6%. Metal and mineral products also weakened, dropping 8.5%. These two sectors accounted for most of the export contraction, highlighting the sensitivity of Canada's trade balance to commodity price fluctuations and global demand.
Despite the overall weakness, there was a notable shift in trade diversification. Exports to destinations other than the United States rose 7.4% to a record C$25.6 billion, driven by aircraft shipments and agricultural products. As a result, the U.S. share of Canadian merchandise exports fell to 66.35% in July, down from 69.39% in June and 72.64% a year earlier.
Stuart Bergman, chief economist at Export Development Canada, called the drop in the U.S. share below 70% a positive development. "Sheer gravity alone pulls exporters to the U.S. market," he told Reuters, but the latest data suggest efforts to diversify are gaining traction.
However, the progress remains partial. Canada's trade surplus with the United States nearly halved to C$5.9 billion as exports to the south decreased 6.6% while imports rose 1.8%. Imports of vehicles and parts surged 11.4% to an all-time high, partly due to fewer seasonal factory shutdowns, which also contributed to the broader goods deficit.
The Canadian dollar strengthened 0.47% to C$1.3776 against the U.S. dollar as of 13:23 EDT, moving in the opposite direction of the trade data. Traders appear to be prioritizing oil prices, interest rates, and broader global dollar flows over a single historical trade figure, as the currency's resilience suggests market participants are looking past the headline number.
The Bank of Canada held its overnight rate steady at 2.25% on Wednesday, citing heightened uncertainty from new tariffs and elevated inflation risks. Bond markets reflected this caution, with Canada's two-year yield ending at 3.11% on September 2 and the 10-year yield settling at 3.80%, up five basis points on the day.
Looking ahead, risks remain tilted to the downside for the trade balance. Fluctuating oil prices could rapidly alter energy export levels, and additional tariffs might simultaneously reduce export volumes and increase import costs. August trade figures are due on October 6, followed by the central bank's next rate decision on October 28. Both will be closely watched to see whether diversification efforts can offset a shrinking U.S. surplus.
