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US, China, Others: The Trade Balance Week

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As investors try to figure out if there will be a global recovery, and how fast it will be, this week we have a series of trade balance releases. Global trade is a strong proxy for economic activity, and can give important insight into where currency rates are going. This could be particularly important at this juncture with central banks hovering over the hold and cut buttons.

Increasing global trade would be a sign that not only a “hard landing” has been avoided, but major economies are showing more dynamism. The corollary of a growing economy is a step up in inflation. So, better than anticipated trade data could weigh on the side of keeping interest rates higher for longer. On the other hand, slowing trade could mean the economy is underperforming, which could have several implications for currencies.

Signs of a Slowing Global Economy?

There are two important variables in how potentially slowing trade could affect currency markets. One is the generalized situation that slower trade means less demand, which in turn means lower prices. That could bring inflation down to target faster and the central bank to cut rates.

Countries that are heavily reliant on either imports or exports can see their internal price dynamics change with trade flows. A country that imports a lot of goods (Japan, US, etc) can see substantial pass-through in prices from imported goods. How imports perform would be a bigger indicator for the effect on the currency than the balance itself. Export countries (China, Australia, Canada, etc), on the other hand, could see their economy slow if exports drop. That in turn could lead to a weaker currency. The export component could be more relevant for the impact on forex than the balance itself.

What to Look Out For

Several major countries are scheduled to report their trade data this week, starting with Canada later in the day. Canada’s trade balance is expected to remain pretty much unchanged at CAD2.3B, despite a projected slight drop in exports. The focus is likely to be on demand for crude exports as Europe could see higher prices from the Middle East.

The US will report at the same time, and is expected to see its trade deficit increase to $64.8B from $64.3B in the prior month. In a sign that the US economy can be facing headwinds, both imports and exports are expected to fall. But the higher deficit is expected to result from exports falling faster than imports, a technical consequence of a weaker dollar in the latter part of December.

Other Key Economies Later in the Week

Australia’s trade balance comes out on Thursday, when analysts expect the surplus to increase slightly. However, that is being attributed to falling imports as opposed to increasing exports. Given how much iron ore Australia exports to China, this could be seen as a bellwether for the world’s second largest economy.

Finally, on Friday China is expected to report a substantial increase in its trade surplus to $76.0B from $68.4B in November. This is thanks to a reacceleration in exports, as imports continue to contract.

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