The swelling of Canada's trade deficit in December isn't necessarily the bad news that knee-jerk foreign-exchange traders initially thought. Still, the trade report amplifies a worrisome trend in the energy sector – one that adds fodder to the currency market's continuing rethinking of the Canadian dollar's value.
Statistics Canada reported a December trade deficit of $1.7-billion, much larger than the $700-million or so that economists had been expecting. Statscan also revised its November deficit figure to $1.5-billion, from an originally reported $940-million. Together that's nearly $1.6-billion more in trade imbalances in the last two months of 2013 than the experts had believed – which means not only more money flowing out of the country (not good for the dollar), but a bigger drag from trade on GDP growth than most economists have been estimating (ditto).
That prompted a half-cent selloff in the loonie, to below 90 cents (U.S.), before traders took a breath and realized that the lousy numbers masked some much more positive news. For one thing, the larger deficit in December was a function of a sizable jump in imports (1.2 per cent month over month) that outpaced an almost-as-large rise in exports (0.9 per cent). For both, that's their strongest growth since the summer, and it's the first positive number on the export side in three months. It suggests an upturn in demand both in the domestic and the export market – something that's surely welcome, and probably helped reverse the dollar's early selloff.
Another source of encouragement was how broad-based Canada's export growth has been. On a year-over-year basis, eight out of 12 sectors have increased their exports, including an 11.8-per-cent jump in consumer goods and a 6.8-per-cent rise in the auto sector. In December, nine of 12 sectors posted export gains.
But the problem is that Canada's biggest export sector – energy – isn't part of that trend. Energy exports have contracted in eight of the past 10 months, by a total of more than 9 per cent in value terms. And it's not a function of lower prices: In volume terms, exports are down 10 per cent.
The vast bulk of those declines have been from crude oil and bitumen, which have shrunk 11 per cent since last February, and have contracted the past four months in a row. (Indeed, the November deficit revision was largely a result of a large reduction in crude-oil export estimates.) This despite an accelerating U.S. economy that, normally, would spell a rise in demand for Canadian energy exports.
For a Canadian dollar whose fate has consistently (and, some would argue, excessively) been tied to the value of the country's oil and gas exports, this is a new twist indeed. Despite the fact that Canadian exporters have, in general, benefited from the U.S. economic recovery (overall exports to the United States are up 5 per cent in the past year), it appears that the boom in U.S. shale-oil production has left Canada's oil exports out of the party.
In the currency market, this wrinkle in Canada's export picture is going to require some adjusting. A petro-currency doesn't look so "petro" when its biggest customer has much less need for its supplies. But if the Canadian dollar isn't so tied to its heft as an oil producer any more, what should it be tied to?
David Parkinson