In March of this year, Canada's trade deficit hit a record wide. The short-term culprit was the energy balance, driven lower by falling energy prices. The longer-term culprit is the non-energy balance, which declined steadily through CAD's big appreciation cycle (2002-2007) and had little time to benefit from CAD's crisis depreciation before CAD started appreciating again (2009-2012).
During that pre-crisis CAD appreciation, the real deterioration in exports was hidden by Canada's positive terms of trade shock (the commodity boom). In nominal terms, the trade balance was deteriorating, but in real or volume terms, it was actually a lot worse. Since CAD started its trend depreciation in early 2013, that process has gone into reverse. The negative terms of trade shock means Canada's trade dynamics now look worse in nominal terms, even as they improve in real terms.
"Nominal deficits do matter - they drive the current account which needs to be funded. They affect national incomes and consumption/investment. But we are interested here in net exports in the context of real GDP growth", says RBC Capital Markets.
