US Trade Deficit

Written by Research | 12 October 2009

Unexpectedly Narrows In August
Pressure on the POUND & the EURO

The British Pound has remained under pressure overnight falling back below 1.600 despite a rise in factory gate prices and a narrowing trade deficit. Broad based dollar strength started the bearish momentum but we have seen sterling regain its footing against the greenback like other currencies, aided by a 0.4% increase in producer prices on an annualized basis.

September saw costs passed on to consumers rise for a seventh straight month by 0.5% which led to the first yearly gain in five months. Meanwhile, declining imports outpaced weakness in exports leading to the narrowest trade deficit since 2006.

The Euro also lost ground in early trading against the dollar but has started to find a bid tone despite an unexpected drop in German exports. Demand from abroad fell for the first time in four months by 1.8% which combined with a 1.1% rise in Imports led to the trade balance surplus narrowing to 8.1 billion from 14.1 billion

USD/JPY jumped on Friday, rose for the first time after three days and posted the biggest daily increase since August. The pair peaked at 89.87, hitting the highest price in almost four days.

Oil prices edged lower Friday because of a strengthening dollar after Federal Reserve Chairman Ben Bernanke said this week that interest rates will have to be raised when the economy recovers in order to avoid inflation.It has been the weak dollar that has attracted billions in investments in energy markets this year because oil is priced in the U.S. dollar. Crude essentially becomes cheaper globally when the dollar falls.

The Paris-based International Energy Agency raised its expectations for oil demand in 2010, but not by much. The IEA said demand will increase by 1.7 percent, largely from rebounding economies in the Americas and in Asia. Major corporations and consumers have pared back on energy use as they ride out the recession. Americans, the biggest energy consumers in the world, have cut way back on driving for the past year.

Yet it has been the falling dollar that has driven oil prices higher for months and on Thursday, the U.S. currency hit a 14-month low against the euro. Oil prices flattened to end the week, showing how much the value of the U.S. currency has come to affect energy markets. Bernanke said Thursday at a fed conference that interest rates will remain near a record low for an extended period. "At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road," Bernanke said.

Producers say they need at least $70 to continue exploring for more oil. With prices at the pump hovering around $2.50 per gallon, few consumers are complaining. Natural gas prices are also very low, meaning an easy winter for most homeowners.

However, the current weakness in the labor market will make it prohibitive for policy makers to begin tightening over the near-term but expect the hawkish rhetoric to increase as they look to prepare markets for the change in policy. That alone could become a supportive factor for the greenback and may end its run as a funding currency. Therefore, watch for fundamentals to grow in importance in determining price direction.

With the value of exports showing a modest increase amid a drop in the value of imports, the Commerce Department released a report Friday morning showing that the U.S. trade deficit unexpectedly narrowed in the month of August. The report showed that the trade deficit narrowed to $30.7 billion in August from a revised $31.9 billion in July. Economists had been expecting the deficit to widen to $33.0 billion compared to the $32.0 billion originally reported for the previous month.

An increase in exports contributed to the unexpected decrease in the size of the trade deficit, with the value of exports edging up 0.2 percent to $128.2 billion in August from $128.0 billion in July. The modest growth was largely due to a 0.5 percent increase in service exports. With the increase, the value of exports increased for the fourth consecutive month, rising to their highest level since December of 2008.

Commenting on the data, Peter Boockvar, equity strategist for Miller Tabak, said, "Exports are of course a key component in determining the pace of U.S. economic growth in terms of helping to soften (can't completely offset) the impact of reduced U.S. consumer spending and we need to make more of the stuff the rest of the world wants, whatever that might be," Boockvar added.

At the same time, the report showed that the value of imports fell 0.6 percent to $158.9 billion in August from $159.8 billion in July. The drop in the value of imports was due in large part to a decrease in the value of crude oil imports.

The Commerce Department also said that the goods deficit narrowed to $41.9 billion in August from $42.8 billion in July, while the services surplus widened to $11.2 billion from $10.9 billion in the previous month. Additionally, the report showed that the politically sensitive trade deficit with China narrowed to $20.2 billion in August from $20.4 billion in July.