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US Trade Balance: Where is the weak dollar hiding?

Written by A Forex View From Afar on Tuesday, June 10, 2008

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Numbers released today show that the US Trade Balance continues to deteriorate at a stepper pace each month, as the weak dollar is not offsetting the higher import price.

The Trade Balance reached a $60.9B deficit in April, up more then 7% from the March revised number of $56.5B. The goods deficit kept widening, while the service balance, the only thing dragging up the number, had another positive month.

The goods deficit reached $4.5B, reflecting a $9.1B gain in imports and $4.5B increase in exports, while the service surplus widened by $0.1B in April from one month earlier.

US Trade Balance

Simply put, the Trade Balance with the biggest U.S. trading partners widened. The deficit with China reached $20.2B, not helped by the yuan, that is constantly strengthening against the dollar. The European Union trade balance reached 8.5$, while the strong euro was supposed to wipe out EU export industry, and the trade balance with Canada reached $7.6B, having a currency that just recently reached parity with the dollar.

So, where is the weak dollar helping the U.S. trade balance? Not here it seems. It’s pretty clear that exports have a strong presence in the PMI and ISM releases, but where the math is actually done, in the Trade Balance release, the dollar is playing a game of hide and seek. Maybe having now seen that the dollar being weak is not really helping exports when the reality of oil prices is taken into account, Mr Bernanke and the gang are talking of inflation as being the new buzz-word. Good for the dollar valuations, no doubt that trade desks will now be looking to build Long Dollar positions, but the impact on the Trade Balance will most likely be a further increase in the negative read.

If an increasing TB number is not covered by overseas investment into the U.S., as seen in the TIC data, the Fed will have another problem; how to balance the current account deficit. The current account is the trade Balance plus the Service side of the economy, and as seen above the service sector is doing well. So maybe this is a turning point, maybe a base is getting formed it, may instigate more dollar bulls coming out of hibernation. Maybe, just maybe a stronger dollar will increase investment into the U.S. and as such sustain the current account with internal consumption.

The fairy tale sounds good, it is based on fact, but the wicked witch that could ruin it, is the financial sector. If loans are not made, and credit is not freed up, the consumer will hold fire, and in doing so will slow down the recovery time. If it were not for it being an election year that would probably be the best thing that could happen; take the bitter pill, adjust to a lifestyle that contains an element of saving outside of the retirement plan, and clear off some debt. In reality that is not going to happen so we'll accept another 5 years of growth before we have 24 months of recession , that gets us to 2013 . Maybe by then we'll have had time to put something by for a rainy day. Whatever happens, the dollar bull is awake, and 71.50 on the Index may not be seen again for a while. Breaking 74.00 will be hard, but if we see oil under $100, gold under $750 and GDP growth later in the year, we could look back at this time as very pivotal.

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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