Canada’s international merchandise trade balance recorded a deficit of $-5.74B in February. This was below the forecast deficit of $-2.3B.
The result came in $3.44B weaker than expected. It indicates the trade shortfall was larger than market estimates for the month.
We see the February trade data shows a surprisingly large deficit of $5.74 billion, far exceeding the expected $2.3 billion shortfall. This result points toward immediate and continued weakness for the Canadian dollar. Derivative traders should be positioning for a lower CAD against the US dollar.
This report reinforces the bearish trend we’ve seen in the CAD, with USD/CAD already testing the 1.3900 level this past month. A deeper look at recent statistics shows exports fell by 2.1%, dragged down by a significant slump in energy products, which echoes the softness we saw in WTI crude prices throughout the first quarter. This isn’t just a one-off number; it’s part of a pattern.
This economic weakness makes it very difficult for the Bank of Canada to consider raising its 4.25% policy rate, especially when core inflation has been moderating. We expect the central bank to adopt a more dovish tone in its upcoming April meeting. This contrasts sharply with the U.S. Federal Reserve, which continues to signal a “higher for longer” stance.
Given this outlook, buying call options on USD/CAD for the May and June expiries looks like a prudent strategy. This allows us to capitalize on further upside while defining our risk. We also anticipate a rise in implied volatility for the CAD, making long-volatility positions attractive.
We can recall the period in late 2024 and early 2025 when similar concerns about slowing global demand impacted our trade balance. During that time, USD/CAD broke through several key resistance levels as commodity prices weakened. The current situation feels very familiar, suggesting a similar path of least resistance for the currency.
