DB FX Daily: Shifting US Trade Dynamics, Canada Adjusts to Stronger Currency

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FX Daily: Shifting US Trade Dynamics, Canada Adjusts to Stronger Currency

US Energy Bill Set to Increase, But Ex-Petrol Trade Deficit May Still Contract
Recent US trade reports have shown a contraction of the monthly US trade deficit as oil import bills declined and the non-petroleum trade deficit improved as well. These two components which had been moving in the same direction may now diverge as the energy import bill may begin increasing as crude oil prices bottomed early this year and have moved higher since. As for the non-petroleum deficit there are several signs that the contractions seen in recent months could be sustained. First, turning to recent China trade data, we can see the normal seasonal drop in China exports to the US in February but perhaps more interestingly, the March trade data did not show a sharp rebound as it had in earlier years (see chart at left below). US non-petroleum imports through February showed their lowest growth rate in two and a half years perhaps as the US slowdown weighs on demand and the US dollar has remained at low levels. As for the export side, the ISM export orders index has softened recently but export prices are strong up over 5% y/y and the expansion outside of the US still appears healthy for now pointing to still solid export growth. In summary, the coming months could see higher monthly trade deficit headline numbers as the energy import bill increases due to the recent rally in crude oil prices but the contraction of the non-petroleum deficit may also continue as US domestic demand is sluggish, the USD is weak and foreign growth remains solid. Such a mix with a contraction in the US non-petroleum deficit is unlikely to prompt too much concern over building global imbalances though the

Have Canadian Firms Already Adjusted to a Higher CAD Level?
Canadian trade data released today could be of some interest as it can provide some information on whether the recent stronger Canadian economic data can be sustained in the face of slowing domestic demand in the US. One encouraging sign for Canada has been the recent recovery in the non-energy trade surplus even as US domestic demand has fallen, perhaps as Canadian firms adjusted to a higher level for CAD. A strong trade surplus (especially non-energy) could bolster the case for those who believe the Canadian economy has decoupled somewhat from the US. As is noted in the latest Dollar Bloc Weekly, the correlation between BAX and Eurodollar contracts has fallen recently as the market has started to see some split in the outlooks.