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US, China Trade Balances: Slowing Global Economy?

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US, China Trade Balances: Slowing Global Economy?
There are several major events this week on the economic calendar that could capture all the headlines. So, let’s have a look at some important data releases that could go under the radar, and shape the evolution of forex in the coming months.

Trade is the real world application of foreign exchange, so it has a uniquely important implication for forex. As opposed to other markets, such as bonds or stocks, which might not be so directly impacted by global trade figures. Global trade defines the demand for specific currencies beyond the interest that traders could have for the differentials in interest rates. Trade is what makes commodity currencies perform, in the end.

So, What Are We Looking At?

The consensus for the moment is that the world has avoided a recession and will likely see solid growth for the rest of the year. That implies that there should be a step up in trade between the major economies. At least China and the US, which are expected to see GDP growth above prior year’s level.

Europe is expected to also increase its dynamism, but remain well below the 1.0% level. With the internal market struggling, Europe might be even more dependent on external economic growth for the Euro to gain strength. That means that trade figures could be extra important for the shared currency, even as traders wonder what the ECB will end up doing, given that Europe is falling into stagflation.

The Data That Matters

As for which data set is likely to have the biggest impact on currencies, well, all eyes are on Friday’s release of Chinese trade data. The Asian giant is expected to see a marginal reduction in its trade surplus as economists forecast the export and import figures will return to a little more balance. We should remember that the prior month saw a sudden, unexpected, expansion in Chinese imports of fuels in particular.

Assuming a renormalization of Chinese trade figures, the forecast is for Chinese exports to grow at a healthy 4.5%, up from 1.5% prior. Chinese imports are expected to grow at a more stable rate of 3.2%, down from the extraordinary 8.4% reported previously. The strong growth could help sustain commodity currencies, as well as help export oriented economies like Europe and Japan. But a miss of expectations could send worries that the global economy is not as solid as markets think it is.

US Trade Remains King

That could be a similar concern from the US if its trade data disappoints on Thursday. The US trade deficit is expected to expand to -$71.0B compared to -$69.4B in April, as imports are seen growing faster than exports.

A strong US economy would be expected to continue to see growth in imports, sustained by healthy consumer demand. In fact, outperformance in this metric could reassure markets about there not being a recession, bolstering higher-risk assets. But a disappointment could suggest weakening consumer demand, and raise the chances of a Fed rate cut sooner than anticipated.

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