USA and Canada: Tale of 2 Trade Balances
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August 13th, 2009 by Kathy Lien
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August 12, 2009 - Today is FOMC day and therefore everyone’s focus is on the upcoming Fed rate decision. In our FOMC Preview and our Game Plan for FOMC , we have outlined our expectations and how to trade it. There are 3 central questions that the market wants answers to 1) Will the Asset Purchase Program be Increased 2) Has the Economy Improved Enough to Warrant an Upgraded Assessment? 3) Is it Time to Talk about Exit Strategies? We only expect the Fed to deliver on one of these fronts. Given the improvements in the labor market data and the manufacturing sector, the central bank has no choice but to turn a bit more optimistic.
As we count down to the FOMC announcement, the currency market is also absorbing the latest trade numbers from the U.S. and Canada. Although the U.S. trade figure was better than expected, the deficit still increased by 4 percent in June. Since the deficit had narrowed to the lowest level in close to 10 years the month prior, a small increase is reasonable. The guts of the report were more encouraging with imports and exports rising more than 2 percent, providing evidence that domestic and global demand is recovering. The dollar has edged higher against the Yen in response to the U.S. trade figures.
Up north, the Canadian dollar has also rallied after their better than expected trade numbers. The country’s deficit shrank to the smallest level since March thanks to an increase in energy and industrial exports. Imports however fell for the fourth month in a row. House prices also dropped for the ninth straight month.
Fed Fund futures are pricing in a rate hike as early as the first quarter and therefore the bar is set high. As a result, we know that traders are looking for some sign of optimism from the Federal Reserve. This can come in the form of an upgraded economic assessment, talk of an exit strategy or any other indication that interest rates will not remain low for an extended period of time. In our opinion, the Federal Reserve will probably retain the tone of the previous statement, mentioning only some of the improvements in the economy and avoid talking about an exit strategy. You can find more details about this in our FOMC Preview ( Will the Fed Deliver any Surprises ). However as the U.K. central bank has surprised us with their dovishness while the central banks of Canada and Australia have surprised with their hawkishness, we do not rule out market moving comments from the FOMC. If the Fed changes or drops their “the pace of economic is slowing” and” economic activity is likely to remain weak for a time,” statements, expect a rally in USD/JPY. If they talk of exit strategies and bond yields start to rise, we could see a more dramatic dollar rally. If the Fed disappoints by downplaying the improvements in the U.S. economy, we could see an ugly reversal in the greenback. The currency pair that will have the purest reaction to the FOMC decision will be USD/JPY. Although we also believe that the dollar could rally against the euro on the heels of a positive outcome, it is too early to tell if the dollar is trading on fundamentals or risk appetite. So the best game plan is to focus on USD/JPY.
Fed’s Options
Kathy Lien is an Internationally Published Author and the Director of Currency Research of FX360.com and GFT. As Director of Currency Research, Kathy is responsible for providing research and analysis for GFT. She also runs an FX Signal Service BKForex Advisor, with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 3 Trillion/day FX market. Kathy is a “Trader First, Analyst Second.” She publishes both technical and fundamental research reports, market commentaries and trading strategies. A seasoned FX analyst and trader, Kathy has direct interbank experience. Prior to joining GFT, Kathy was the Chief Strategist of DailyFX.com and worked in JPMorgan Chase’s Cross Markets and Foreign Exchange Trading groups using both technical and fundamental analysis to trade FX spot and options. She also has experience trading a number of products outside of FX, including interest rate derivatives, bonds, equities and futures. She has taught seminars around the world on day and swing trading the currency market. Kathy frequently appears on CNBC, Bloomberg, and BNN as a expert commentator on currency markets. Read more from the author/contributor here.
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Tags: Asset Purchase, Canada, Canadian Dollar, Central Questions, Currency Market, Economic Assessment, Exit Strategies, Exit Strategy, Fed Rate, Federal Reserve, Fomc, Game Plan, Global Demand, House Prices, Imports And Exports, Industrial Exports, Manufacturing Sector, Rate Hike, Row House, Trade Balances, Trade NumbersPosted in Markets |
