Hours after the team announced the addition of Morales on Friday, general manager Ross Atkins said talks with Encarnacion "are ongoing, they're still continuing."
Encarnacion and Jose Bautista both became free agents after helping Toronto reach the playoffs.
"We still feel that both are realistic for us, but again, when you sign someone like Kendrys Morales, that decreases the likelihood of Edwin coming back to the Blue Jays, but by no means eliminates that possibility," Atkins said.
The 33-year-old Morales hit 30 home runs with 93 RBI while batting .263 for Kansas City last season.
Atkins said second baseman Devon Travis had surgery on his right knee and is expected to be fine. He was injured in the playoffs against Cleveland.
Toronto also claimed right-hander Leonel Campos on waivers from San Diego. The 29-year-old pitched 25 times for the Padres over three seasons.