Canada: Q3 Balance of International Payments, 2016

Canada’s current account deficit (on a seasonally adjusted basis) narrowed $0.7 billion in the third quarter to $18.3 billion, following three straight quarterly increases.

In the financial account (unadjusted for seasonal variation), strong foreign investment in Canadian corporate bonds led the inflow of funds in the quarter.

Current account

Overall deficit on trade in goods narrows

The deficit on international trade in goods narrowed $2.7 billion to $8.3 billion in the third quarter, following a record deficit of $11.1 billion in the second quarter. Exports outpaced imports as exports saw the highest growth since the first quarter of 2014.

On a geographical basis, the goods surplus with the United States increased $3.1 billion to $8.4 billion, led by stronger exports of energy products. In contrast, the deficit with non-US countries rose $0.4 billion to $16.8 billion, mostly reflecting a large import of industrial machinery, equipment and parts from South Korea destined for the Hebron offshore oil project in Newfoundland and Labrador.

Total exports of goods increased $5.9 billion to $130.1 billion in the third quarter. Energy products were the major contributor with exports up $2.3 billion on higher prices and volumes. In addition, exports of metal and non-metallic mineral products increased by $1.0 billion, mostly from higher prices. Consumer goods were up $0.7 billion on higher volumes, following a $1.6 billion reduction in the second quarter.

Total imports of goods rose $3.2 billion to $138.4 billion. The largest increase was in industrial machinery, equipment and parts, up $2.6 billion on higher volumes. Energy products and motor vehicles and parts also contributed to the gain, with both categories posting a $0.5 billion rise in the quarter. In contrast, aircraft and other transportation equipment and parts fell $1.4 billion on lower volumes, following a $0.9 billion increase in the previous quarter.

Trade in services deficit edges down

The overall deficit on international trade in services edged down $0.2 billion to $5.3 billion in the third quarter. This was the sixth consecutive quarterly reduction in the services deficit, mostly led by a lower travel deficit. Since the first quarter of 2015, the services deficit has narrowed by $1.0 billion.

The travel deficit was down $0.1 billion to $3.5 billion in the third quarter. Non-residents increased their spending in Canada as a result of more visits during the quarter. This was partially offset by larger payments made by Canadians travelling abroad. The travel deficit has diminished by $1.3 billion since the first quarter of 2015.

Changes in the transportation services deficit and the commercial services surplus were marginal in the quarter.

Deficit on investment income expands

The investment income deficit increased $1.6 billion to $3.5 billion in the third quarter. Profits earned by foreign direct investors on their Canadian assets were up $1.4 billion, nearly returning to 2015 year-end levels. Meanwhile, profits earned by Canadian direct investors on their assets abroad were largely unchanged.

Payments on foreign holdings of Canadian securities increased $0.3 billion in the third quarter, following a decline in the second quarter. Revenues from holdings of foreign securities were up by $0.1 billion.

Financial account

Foreign portfolio investment in Canada focuses on corporate securities

Foreign investment in Canadian securities amounted to $33.6 billion in the third quarter, a third consecutive quarter of strong investment led by acquisitions of corporate bonds. Foreign acquisitions of Canadian bonds reached $30.6 billion, with nearly two-thirds in new issues of corporate bonds denominated in foreign currencies. Foreign purchases of federal government bonds on the secondary market also contributed to the inflow of funds in the quarter.

Foreign investors withdrew $7.1 billion of funds from the Canadian money market in the quarter, mainly provincial government and corporate paper. At the same time, they added $10.2 billion of Canadian equities to their holdings, following a $16.0 billion investment in the second quarter. Foreign investment in Canadian equities was led by purchases on the secondary market. Canadian stock prices were up by 4.7% and the Canadian dollar depreciated against its US counterpart by 1.2 US cents in the quarter.

Canadian investment in foreign securities slows

Canadian investors acquired $8.0 billion of foreign securities in the third quarter, down from a $13.8 billion investment in the second quarter. The investment activity was in foreign shares as Canadian investors reduced their holdings of foreign debt securities during the quarter.

Canadian purchases of foreign shares were $11.7 billion, led by acquisitions of non-US foreign shares. At the same time, Canadian holdings of foreign debt securities were down by $3.7 billion, mainly non-US foreign bonds. The divestment in foreign debt securities was the highest in more than five years.

Direct investment assets increase

Transactions in direct investment assets totalled $24.4 billion in the third quarter, up from $14.3 billion in the second quarter. The bulk of the investment in the quarter was in the form of equity instruments. Two-thirds of the direct investment abroad was related to merger and acquisition activities in the United States.

Direct investment liabilities rose $7.0 billion in the third quarter, lower than the first two quarters of the year. Equity investment made by foreign parents in Canadian affiliates accounted for all of the increase in the quarter as there was a reduction in debt liabilities of Canadian affiliates to their foreign parents. In the first three quarter of 2016, direct investment from abroad totalled $30.3 billion, compared with $69.2 billion for the same period in 2015.

Other investment generates an inflow of funds

The other investment category of the financial account generated a net inflow of $7.7 billion in the third quarter. An increase in currency and deposits held by non-residents in Canada, mainly transactions of Canadian banks with their foreign affiliates and branches, was partially offset by a gain in both loans and currency and deposits held by Canadians abroad.

StatsCanada

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell