Morning Commentary: The Paradox of the U.S. Trade Deficit

Foreign Exchange - Morning Commentary
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The U.S. posted a larger than expected trade deficit for December at $59.8 billion, bringing the total trade deficit for 2018 to $621 billion.  Both numbers are the largest in the past ten years. The Trump administration has been highly riveted on correcting unfair global trade agreements and trade practices and attempting to level the playing field to help promote U.S. exports and reduce the large U.S. trade deficit.  Much more time will be needed to see the results of their efforts.
But in the short term, part of the paradox and enigma of the expanding U.S. trade deficit is rooted in the U.S. economy's exceptionalism relative to its peer group.  The faster we grow, the greater the demand for imports is as 70% of the U.S. economy's GDP is based on consumer demand.  So far the additional cost of tariffs on products has not deterred the consumer.    
Conversely, our peer group has seen their economies weaken, leading to less demand for U.S. exports.  This differential in G10 growth rates is part of the reason why the U.S. trade deficit has been ballooning despite the Trump Administration's best efforts to correct and amend unfair trade practices and pave the way for greater U.S. exports.
Of the $59.8 billion trade deficit for December, the breakdown of countries looks like this: China $38.7 billion, European Union $15.8 billion and Mexico at $8.8 billion. With regards to China, U.S. exports to China fell for the year by $9.6 billion while U.S. imports from China surged by $34 billion. For the EU, U.S. exports and imports with the EU both surged, though imports posted a larger gain. Much more work needs to be done by both leveling the playing field regarding trade practices and hopefully seeing better growth from Asia and the EZ for our exports to make a dent in our trade deficit.
  • Australian Q4 GDP came in weaker than forecasted at 2.3% YoY versus expectations of 2.6% YoY.  This followed a Q3 GDP of 2.8%. Q4 was the weakest quarterly GDP number since Q2 2017. Aussie interest rates are down sharply and the Aussie dollar is down in five of the past six sessions.
  • The U.S. ADP employment report for February (precursor to Friday’s official employment report) came in slightly below expectations at 183,000 against estimates of 190,000. January was revised much higher from 213,000 to 300,000. U.S. and all G7 interest rates are down sharply on the session.
  • The Bank of Canada held interest rates steady at 1.75%.  However the central bank noted a "mixed" data picture and indicated an increase in uncertainty in the timing for future rate increases.  The CAD weakened sharply on this announcement, continuing its slide since the beginning of March.     
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