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US and Global Trade Balances: More Upside for Dollar?

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As the global economy loses dynamism, the lack of growth isn’t evenly distributed. That means some currencies stand to gain, while others lag. The recent global trade balance figures suggest an emerging pattern of where money is flowing, and which currencies could see increased demand.

Earlier in the week we saw European trade data, and later in the day we will see US and Canadian trade figures. With global central banks moving towards an easing bias this year, the countries that manage to maintain dynamism could attract the most investors. That will likely be reflected in the respective nation’s trade figures.

The Divergent Global Economies

Germany reported a surprise bump in its trade surplus on Monday. While the initial reaction was positive, a closer look at the numbers revealed concerns: Both imports and exports had fallen significantly in December. The surplus was bigger only because imports dropped even faster than exports. That is a sign of weaker demand within Germany, as well as weaker demand among Germany’s largest export partners. The biggest of those being China.

As Europe looks to decouple from China, and the Asian giant battles economic doldrums, the effects are seen with slowing trade numbers. For forex traders, what’s concerning is that with less trade, there is less demand for the respective currencies to pay for the goods and services. The slowing economic activity also means the respective central banks will be more inclined to cut rates, which also weighs on the value of the currency.

What to Look Out For

While Europe and China are seeing their trade activity diminish (both imports and exports), in the Americas it’s a different story. Both Canada and the US are set to report their respective global trade balances later today. While the US is famous for its trade deficit, what matters for the future evolution of the greenback is how active US trade is.

The US trade deficit is expected to shrink marginally to -$63.0B from -$63.2B in the prior month. But what’s likely more important for where the dollar could be going in the next few months is the components. Both exports and imports are expected to increase, a sign that US consumer demand remains healthy, and US business remain competitive despite the dollar’s strength.

Not Just the US

By extension, the countries that trade predominantly with the US are likely to see support from the American economy’s dynamism. That includes Canada, which is expected to report an increase in its trade surplus to $1.8B from $1.6B prior. The US is Canada’s main trading partner, and exports a considerable amount of oil southwards. Canadian imports are expected to grow, but exports are seen growing even faster, in part aided by the recent higher crude prices.

With a dynamic economy, there will be more inflationary pressure that will likely keep the Fed hesitant to cut rates. If other economies see slowing growth, then the dollar’s safe haven status could come into play as well, further supporting the greenback.

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