Forex Trading Library

US, China, and Shrinking Trade

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Economists are forecasting some concerning data to be reported tomorrow. But, that doesn’t necessarily mean the market will react immediately, and it could go a little under the radar. With so much attention on central banks and when they will bring the rate hike cycle to a close, the markets are ignoring some of the fundamentals. But that doesn’t mean they won’t drive expectations in the long run.

Investors have become increasingly confident lately that the world will avoid a major recession. That trend saw a bit of interruption last week when Fitch downgraded the US sovereign rating. But after the ambivalent NFP data on Friday, markets might be looking for a new direction. And that could come from the trade data of the world’s two largest economies.


Why it matters

Trade demand is one of the key indicators of global health. Given how globalized the economy is, economic dynamism inevitably implies increased demand for goods from overseas. If all economies are doing well, then the volume of global trade will rise. The concerning thing is vice-versa. Slower trade means that consumers on all sides are feeling the pinch of higher prices. If this lasts long enough, eventually the economy will tip over into a recession.

It’s especially important for forex traders because one of the drivers for the price of currencies is the demand to pay for goods and services that were bought from or sent overseas. Slower trade means less demand for the currency, which will make it weaker. This could accelerate some of the moves in the forex markets that we’ve been seeing, as risk and safe haven flows are augmented by trade flows.


What the data says

The forecast for both China and the US is that they will experience slower trade. Not just between them, but from all of their trading partners. The US, as the world’s largest economy, is also the centre for global trade. If it is seeing slowing demand, it could be a sign of global economic weakness.

China is the world’s largest exporter and the main manufacturer of a wide array of consumer goods. Slowing exports from China can be seen as a worrying sign of slowing economic growth. Slowing imports into China is a sign that domestic demand is faltering, and could have knock-on effects on commodity currencies like the Canadian and Australian dollars. Europe and Japan also export substantially to China, and slowing Chinese demand could not only weigh on those economies but on their currencies as well.


What to look out for

China’s trade balance is expected to show its July surplus shrank to $69.0B from $70.6B in June. This is mainly due to exports expected to contract faster than imports. Chinese exports are expected to experience a -14.0% drop, on top of the -12.4% drop seen in June. The import situation is seen as a little less dramatic, falling -5.2% compared to -6.8% previously.

The US is in a comparatively better situation, with the trade deficit seen shrinking to $65.1B from $69.0B prior. Imports are expected to slow slightly, but exports are seen rising fractionally. But, this is denominated in dollars, with the dollar index having come under pressure in July, the implication is that the gain is explained by the difference in exchange rate.

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