Canada’s international merchandise trade balance recorded a deficit of $-1.3B in December. This compared with forecasts of $-2.1B.
The result was $0.8B smaller in deficit terms than expected. It indicates the gap between exports and imports was narrower than projected for the month.
Implications For Canadian Markets
The better-than-expected trade number for December 2025 is a positive sign for the Canadian economy heading into this year. A smaller deficit suggests more robust economic activity than many had priced in. We should view this as a signal to reassess bearish positions on Canadian assets.
For foreign exchange traders, this data provides a tailwind for the Canadian dollar. The CAD has already strengthened to around 1.33 against the US dollar, and this report could push it further as it counters the narrative of a slowing economy. We should consider buying short-dated CAD call options to capitalize on potential near-term momentum.
This economic strength makes it less likely that the Bank of Canada will cut its 3.5% policy rate in the near future. The market has been pricing in a potential cut by June, but with January’s inflation holding at 2.8%, this trade data adds to the case for the bank to stay on hold. Interest rate swaps pricing in an imminent cut may now be misaligned.
Looking back, the strength in the fourth quarter of 2025 was likely driven by firm commodity prices, with Western Canadian Select oil averaging above $70 per barrel. This trend appears to be holding, providing a solid foundation for Canada’s export values. This reinforces a positive outlook on derivatives tied to the Canadian energy sector and the S&P/TSX 60 index.
Positioning And Volatility Considerations
We saw a similar situation in 2023, where stronger-than-expected Canadian data forced a quick repricing of rate expectations relative to the U.S. Federal Reserve. Given this historical precedent, we should anticipate increased volatility in the coming weeks. A strategy using options to play a range-bound but volatile USD/CAD seems prudent.
