Trade deficits add another layer of complexity

Trade deficits are widening. The US deficit was smashed overnight on the USD’s strength as expected, seeing a deficit of US$48.33 billion.

Source: Bloomberg

Points of note

  • US exports hit a four-year low, with real goods exports down 1.5% month-on-month
  • Imports increased 3.1% month-on-month from a 0.8% decline the month before
  • This was its second largest monthly trade decline in the past eight years. The worst month was March this year when the USD really started taking off
  • Economists have tweaked Q3 GDP lower by 0.5% to 1.7% for the quarter. It’s early in the piece but something to be aware of

The deficit adds another layer of complexity around the Fed lift-off. The USD is becoming quite the horn.

It makes the whole business of raising rates even more problematic as it will put even more pressure on US exports. Particularly considering two of their largest export markets Japan and Europe are more likely to stimulate and devalue their currencies. The Bank of Japan (BoJ) meets today and there is growing expectation (30% chance) it could ramp up bond buying even more. USD/JPY could see ¥124 in days if this happens. 

Elsewhere in the overnight trade

  • S&P snapped out of its longest daily increase for 2015, falling 0.36%
  • DOW slid into the close but finished just in the green
  • US futures markets also slid at the back end of the day. How they behave in the Asian session will drive Asian trade

Shifting across the Pacific, Australia’s deficit also widened. This has nothing to do with the AUD but everything to do with commodities.

  • Deficit widened to A$3.1 billion. Estimates were for an A$2.4 billion deficit
  • Exports were slightly weaker, -0.5% month-on-month
  • Imports were slightly strong, +0.6% month-on-month
  • Trade balance remains near record highs of A$3.3 billion
  • Further declines in the commodities complex gives me reason to see a new record deficit for Australia – it’s really only a coal or iron ore collapse away
  • The AUD will see import prices on the upside which is a positive; however, it won’t be enough to offset export price declines as commodities will decline faster and harder

This brings the Reserve Bank of Australia’s (RBA) view on the domestic world into focus. After yesterday’s expected non-event and a statement that saw a handful of changes, 2015 cuts look unlikely. The interbank market’s view reflects this shifting lower immediately with a Melbourne Cup move falling to 26% and a Christmas cut falling to 41%.

AUD at 71.5 cents suggests that the currency market agrees with no cuts in 2015, however the deficit and the fact GDP is edging closer to the possibility of the R-word will make February an interesting meeting. The eight-week summer break for the RBA could produce a similar realisation to that of last year’s summer break. A further blow out of the trade balance will make terms of trade a major concern as housing settles down. We still see any move by the RBA to the downside rather than to the upside.

Ahead of the Australian open

The rally in the ASX over the past six sessions is slowing down, however it should hold on for one more day. We expect the ASX to add 21 points to 5189 this morning as the energy sector once again sees a short squeeze on the Brent price being back above US$50 a barrel.

There is plenty of fundamental value in the market, cyclicals are moving away from some of their largest discounts to net present value in the past seven years and after the August-September rout, the value is still very much there.

The question will be whether crushing pessimism of most top-down views overrides the bottom-up optimism that is currently presenting itself.

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