Canada’s trade deficit widened to CAD 5.7 billion in February, compared with market expectations for a CAD 2.5 billion shortfall. The data were described as volatile, with both exports and imports rising sharply.
Around one-third of the rise in imports came from higher gold product imports. Imports of equipment and consumer goods also increased.
Net trade was tracking as a large subtraction from first-quarter GDP growth. This was alongside stronger domestic business and consumer spending.
Motor vehicle exports rose strongly, adding to indications that production disruptions affecting manufacturing output in late 2025 and early 2026 were easing.
March’s nominal trade deficit was expected to narrow, as the February surge in gold imports was not expected to repeat. The bank projected that trade would be a smaller drag on Canada’s growth in 2026.
We should view the sharp widening of Canada’s February trade deficit as a potential mispricing opportunity. The market likely reacted negatively to the headline $5.7 billion deficit, which was more than double the forecast and the largest gap seen since mid-2023. This knee-jerk reaction has likely pushed the Canadian dollar lower against the USD than fundamentals would suggest.
The details behind the deficit figure are more important than the headline number itself. A large part of the import jump was due to a one-off surge in gold products, an event not expected to be repeated in the March data. Historical data shows that such large, non-monetary gold movements are rare and tend to reverse, suggesting the trade balance will narrow significantly in the next report.
Furthermore, the report contained clear signs of economic strength that argue against a weaker Canadian dollar. Motor vehicle exports surged, confirming that the manufacturing disruptions that plagued the sector in late 2025 are easing, with Statistics Canada reporting a 4.8% rise in auto assembly in February. Stronger imports of machinery and consumer goods also point to robust domestic demand, which may keep the Bank of Canada from cutting interest rates as aggressively as the market anticipates.
This situation suggests positioning for Canadian dollar strength in the coming weeks. The overreaction to the February deficit provides a window before the much-improved March numbers are released. Options strategies, such as buying CAD calls or selling USD/CAD calls, could be used to capitalize on the expected rebound as the temporary gold distortion fades from the data.
