Morning Commentary: U.S. Trade Balance – A Big Improvement

Foreign Exchange - Morning Commentary

U.S. Trade Balance – A Big Improvement

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, markets are very mixed. Markets and central banks (New Zealand last night) continue to push a more dovish agenda as the markets continue to price in future global rate cuts. Last night, U.S. 2-year and 10-year yields made new lows for this cycle before rebounding. Global equities are not sure how to respond; on one hand, the lower interest rates are a positive, but fears about a global slowdown and weaker growth and earnings are a negative and have left them very mixed this morning.
The U.S. trade deficit for January showed a significant improvement from the widest deficit in nearly a decade after the December report. The trade deficit came in much smaller than forecast at $51.15 billion against expectations of $57 billion…December’s deficit was near $60.0 billion and near a 10-year high. Imports fell by 2.6% (a seven-month low) while exports got a boost of 0.9% as soybean exports surged. Imports from China shrank by 12.3%.
What does all this mean for the U.S. dollar? The DXY index is up again today and for the fourth day out of five. Emerging market currencies got slammed today and the U.S dollar is stronger against almost all the major currencies. But stepping back to see the forest for the trees, the DXY index has been on a rollercoaster ride all year. Cycles, both bullish and bearish, seem to last about five to ten days before they lose momentum and energy and reverse course. Overall, the DXY index is nearly unchanged from October. Continue to expect more of the same in the short term.
  • The Reserve Bank of New Zealand (RBNZ) left interest rates unchanged at 1.75%; rates have been unchanged since November 2016 where the central bank last cut rates by 25 bps. But RBNZ Governor Orr surprised the market as he moved the central bank to a dovish bias following the trend of other central banks. New Zealand interest rates fell sharply with the 2-year yields dropping by 12 bps to 1.40%. The New Zealand dollar collapsed by nearly 1.46%.
  • The Canadian trade deficit for January also improved sharply from a record deficit in December. January’s deficit was C$4.3 billion compared to December’s deficit of C$4.8 billion. Until December, Canada had never posted a trade deficit exceeding C$4 billion; the monthly trade gap has averaged about C$2 billion for the past four years. Deficits have been on the rise due to both plunging oil exports and crude oil prices falling sharply at the end of the year. The improvement in the trade deficit was due to oil prices rebounding in January.
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