As central banks move to step back from intervening in their currencies at every meeting, the fundamentals of forex are starting to reassert themselves. That is particularly the case for export-oriented economies. The primary use of foreign exchange is to pay for trade. So, if trade increases or decreases, it logically has a direct impact on the value of the currency.
The shifting prices in yields can outweigh the impact of trade. But trade also implicates the economy, which also can drive bond yields. At the moment, the global Forex market is being distorted by consistently rising US yields. That’s based on an expectation that the US economy will continue to grow. But, economic growth requires trade, and a slowdown in the global exchange of products will inevitably have an impact on the currency pairs.
The Sick Man of Europe
Trade is particularly a concern for Europe at the moment, as the shared economy needs to import several key materials. The cost of those imports weighs on the Euro, if they aren’t compensated by an equivalent amount of exports. The main export market for European goods is China, led primarily by high-end technology goods from Germany.
But the German economy has been under pressure due to high input costs and lower demand from their largest trade partner. The slowing of German exports could mean a weaker Euro. That would increase raw material costs and push up inflation in the shared economy, which in turn could break the current expectation that the ECB will keep rates steady
What to look out for
Germany’s trade balance is expected to expand to €16.8B from €15.9B in the prior month, which would be a good sign for the economy. But, in a theme that has been seen in most other trade data, it’s because imports are expected to slow faster than exports. As consumers face a cost of living crisis, they buy less. In turn, that would be a warning for a weaker economy, which could weaken the currency. The resulting higher inflation could then start the cycle anew.
Australia’s trade balance is expected to expand substantially to $8.5B from $8.0B as China keeps buying raw materials despite the slowing economy. Iron Ore has remained relatively close to the $100/ton floor, and inventories for the material have been building up in China.
The big traders
Canada is expected to post another trade deficit despite the recent spike in crude prices. Although the deficit is expected to be slightly smaller at -$0.7B compared to -$1.0B in August. Slowing inflation in Canada has apparently brought back domestic demand, which has pushed imports above exports. But, it’s usual for a growth of imports into Canada during the summer, as the country is much more dependent on weather conditions for economic activity.
Where the main focus could be is on the US, as traders look to see how secure the country’s economic growth is. After all, that’s what is currently funding the dollar’s strength. The flip side of a stronger dollar is that it makes it harder to export, which could dent the economy. However, analysts don’t seem to be concerned with that yet, as the US is expected to buck the global trade trend by substantially increasing exports and shrinking imports. The US trade deficit is expected to fall to $58.3B from $65.0B in August.
