US Dollar Trades Higher on Lowest Trade Balance Deficit Since 2005

How Did The Markets React? 

The US Dollar saw fresh 3-month highs against the Euro, as an unexpected improvement in the nation’s trade deficit improved outlook for the world’s biggest reserve currency. Renewed optimism was likewise seen in other asset classes, with a sharp drop in bond prices indicative of US economic bullishness, while US equities posted impressive rallies on plummeting oil prices. Improving exports and falling imports led the US trade deficit slightly lower through November, marking the third consecutive month of improved figures. In fact, the 1 percent decline was enough to leave the imbalance of trade at its best levels since July, 2005. Consistently lower crude oil prices eased pressures on the national import bill and in and of themselves led to a sharper dollar rally. This was most visible through later morning data, as a government report showed that demand for energy plunged by the most in four years. With US refiners overstocked with crude oil and distillates, the formerly prized commodity fell below $54 a barrel through the day’s trade. Whether or not this can continue to bolster the dollar remains to be seen, but the Greenback may look to ride recent momentum even higher against its major counterparts.

Bonds – US 10-Year Treasury Notes

US Bond prices fell again on stronger-than-expected economic data, with the 10-year Treasury Note adding 3 basis points in yield through the market close. In fact, bearish momentum was enough to force a close below the previous low for the first time in two weeks—typically a strong sign of continued bearish momentum. Risks may remain to the downside for bond prices on US economic strength, but this could all change on a surprise in the upcoming Advanced Retail Sales report. Due on Friday morning, traders expect that the headline retail figure will have added a seasonally adjusted 0.7 percent through the month of December. Given the importance of year-end holiday consumer spending, this report will likely have a significant impact on outlook for domestic retailers. Market expectations are riding high on strong Consumer Confidence on the month, but any negative surprise could lead to significant retracements across asset classes. Indeed, the US dollar would likely give up some of its recent gains on a disappointing figure.

FX – EURUSD

Today’s trade report triggered another wave of dollar bids throughout the majors. The response from many pairs brought spot right up to major support or resistance levels, increasing the risk of substantial breakout should Friday’s releases produce sufficient surprise. Back to Wednesday’s trade figure, the day’s of consistently higher trade deficits seems to be over. Slimming down for the third consecutive month, the $58.2 billion deficit in November is the smallest it has been in 16-months. Even the components of the report have stocked optimism for the future of goods and services trade flows for the United States. Exports for the period rose 0.9 percent to a record $124.8 billion, while imports sat on a more modest 0.3 percent advance to $183 billion. For shipments of American goods abroad, the improvements were seen in key categories for the economy. Auto sales rose as cheaper gasoline encouraged foreign dealers to restock showrooms, telecommunications products were snatched up by European and Asian firms boosted capital spending and the symbolic leader of the trade figure (commercial aircraft sales) similarly grew. Furthermore, the trade balance with China finally backed off of its steady record setting pace. Despite all of this, however, the dollar’s reaction was rather muted. The EURUSD pair was only able to hold onto a 55-point advance with the help of a weak crude inventories number. This reaction may be explained by the major support level seen at 1.2925, though the same reaction a similar reaction has developed after many of the previous trade numbers. Such a trend may reveal the currency market’s indifference for the consistently high numbers and the non-stop warnings from politicians of protectionist agendas.

Equities – S&P 500 Index Futures

Though US equities found a decent bid in the minutes after the open of trade, the influence trade may have had is hard to discern. In the 30 minutes after the actual deficit hit the tapes, the active S&P 500 Index futures contract rose less than two points. From there, the open of capital markets brought an eventual run in futures, but the underlying S&P 500 itself actually spent the first half of the day struggling in the red. From an economic standpoint, the trade report signaled a strong trend for the economy and US businesses. The record export ticket was especially promising for local firms concerned over stubbornly high interest rates and a slowing housing market that undermines consumer spending. However, the other factors looked either transitory or insignificant for most businesses. Driving the improvement in the trade report, the drop in foreign crude represented a price gouge that most cautious executives consider temporary just to be safe. What’s more, the shipments to Europe may come under pressure in the months ahead as the VAT tax in Germany takes full effect. But what is most likely is, like currency traders, the continual high reads of the deficit has dulled equity traders’ reactions to the trade report. Instead, the benchmark index finally pushed its head above water later in the session on the back of an optimistic start to the earnings season and yet another drop in energy prices. Aluminum giant, Alcoa, kicked off fourth-quarter reporting with a better than expected 60 percent rise in profit that sent shares 6 percent higher on the day. At the same time, crude oil finished the day just above $54 per barrel for another $1.62 per barrel drop. While today’s macro data was not particularly market moving, Friday’s retail sales could have much more impact as the consumer concern continues.