Wednesday January 12, 2005 - 11:29:13 GMT
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Black Swan Capital - www.blackswantrading.com
Is trade already in the dollar price?
“With exports growing faster than imports, [China’s] December’s trade surplus was a record $11.1bn. As Capital Economics notes ‘It is a safe bet that the largest bilateral surplus is with the US and this has probably hit another record high too,’” wrote Philip Coggan in the Financial Times yesterday. In other words, the US trade balance is poised to get even worse.
US Balance of Trade: Goods & Services Millions (Quarterly) chart:
The dollar is still in consolidation mode, as it digests or regurgitates its gains during the first week of the year. The question is: Will a bad trade number be a much of a surprise given what we already know about China? Is that news already in the price?
Surprise moves prices. And the surprise in this mornings release would be a better-than-expected number.
But I want you to take a look at the trade balance chart again, this time I will try to line it up with the US $ Index. Tell me if you notice the same thing I do:
US Trade Balance vs. US dollar index (quarterly)
I notice that it is very difficult to assume some king of relationship between the trade balance and the dollar. Maybe we have reached that proverbial trigger point? Possible! But history suggests the trade balance in and of itself is not a good indicator to use for dollar trading.
I still believe the interest rate argument is most compelling at this stage of the cycle.
10-year Benchmark Government Bond Yields
Country % Central bank comment
Australia 5.12 On hold as housing and commodities deflate
UK 4.36 Next move could be down
US 3.20 Next move will be up
Canada 3.11 On hold; playing wait & see
Germany 2.41 On hold indefinitely (morbid job market)
Switzerland 0.83 Likely to wait for ECB before it moves
Japan 0.10 Stuck at zero as economy in trouble again
The Fed is the only central bank actively in rate hiking mode. This should appear quite attractive to cash deposits seeking yield. Should international investors begin to commit to the dollar in the form of speculative capital flow, it could quickly become self-reinforcing and self-validating.
“The massive amount of hot money in China’s economy makes it vulnerable to the US’s rising interest rate trend,” Andy Xie recently commented. Maybe its time for some of that hot money to return to US shores…
So, I’m sticking to the interest rate a la rising yield differential for the dollar story, for now despite the expected “bad” news on trade soon to be released.
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