Items Tagged With deficit

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total March exports of$114.7 billion and imports of $176.7 billion resulted in a goods and services deficit of $62.0 billion, $3.6 billion less than the $65.6 billion in February, revised. March exports were $2.1 billion more than February exports of $112.5 billion. March imports were $1.5 billion less than February imports of $178.2 billion.

In the future, if you want this report "live", go to the following URL and just keep clicking refresh around 8:30 am EST:

http://www.census.gov/foreign-trade/Press-Release/current_press_release/ftdpress.txt

Moving on to Latin America, Wednesday was a good day for the Brazilian real. The currency rose for the first time in four days. The real gained one percent against the dollar today. This was due to expectations of an increase in exports and foreign direct investment (FDI).

Brazil’s central bank had earlier raised its current account surplus forecast for 2006 on these trends. The nation had a current account surplus in February as against a deficit in January. Brazil is Latin America’s biggest economy. The revised trade surplus forecast is $39 billion while the FDI forecast is $18 billion.

I wanted to do a study on my own between the EUR/USD and interest rate differentials so I gathered all historical interest rate data from 1/1/1999 to present.  What I found was that there was no correlation between the actual differential and the price of the currency pair.  What I did find was the following:

We are in the third cycle of price changes.  What I mean by this is that there was an extended period where the USD gained versus the EURO (Cycle #1) and then an extended period where the EURO gained versus the USD (Cycle #2).  Currently there has been another extended period where the USD has gained versus the EURO (Cycle #3)

Here are my estimates of cycle length:

Cycle #1 - 01/1999 - 05/2001   BULLISH USD (29 months)
Cycle #2 - 05/2001 - 12/2004   BEARISH USD (43 months)
Cycle #3 - 12/2004 - present    BULLISH USD (16 months +)

I found that the most defining point regarding the change of cycle was that it happened right after the interest rate differential between the EURO and USD hit 0%.

Here are the periods of time when the differential hit 0.00%:

5/11/2001
11/10/2004 

As you can see, there is a correlation between the differential being 0% and the change of cycle.  Unfortunately we have limited data since the EURO has only been in existence for the last 7 years or so.

If I was to use this information to predict the future direction of this currency pair, I would have to predict that the USD will remain BULLISH for quite some time to come.  Seeing that the interest rate differential currently is 2.50% and the fact that the Fed may increase rates 2 more times, I cannot foresee this differential decreasing anytime soon.   

I don't know if this study is B.S. or not.  There are many other economic factors that can affect currency prices and I didn't take any of these into consideration such as the US Account Deficit or the Eurozone's slower GDP growth.  In addition, with Iran switching to EURO's for payment of oil, there are other things in play that make it more difficult to predict the future. 

 EUR/USD Interest Rate Diff- Excel (20.50 KB 06.03.2006 11:32) 

Over the past few years, the failure of the USD to decline in response to soaring trade deficits has baffled economists, leading some to propose that the only reason the USD has not depreciated is foreigners’ continued willingness to finance the deficits. A new theory, however, is quickly gathering support among economists. It suggests that the common interpretation of current account deficits is unreasonable. Basically, a significant portion of US trade takes place between US companies and their foreign subsidiaries. A change in exchange rates, thus, would not cause much of a change in trade patterns. As a result, a rising current account deficit may not be as large of a problem as has long been argued, as a decline in the USD would not produce a significant drop in the deficit. Reuters reports:

One reason put forward for the growing impotence of currency rates in synching trade accounts is that national trade statistics disguise the real nature of trade flows.

As the US twin deficits expanded over the last decade, economists and currency traders have turned a blind eye, pointing to foreigner’s continued willingness to finance the deficit as the reason for their indifference. However, such economists are the first to admit that as soon as foreigners lose their appetite for investing in US assets, the USD will surely suffer. That day may come sooner as later, if viewed from the perspective of the latest release of US capital flows data. In December, foreigners invested 57$ Billion into the US, a sharp drop from the $90 Billion invested in November. This represented the first time in almost a year that the monthly trade deficit exceeded capital inflows, and could serve as a harbinger for a massive USD ‘correction,’ to occur over the next few years. The Financial Times reports:

The drop in net US inflows was almost all the result of a sharp fall in net buying of Treasuries. Foreigners bought a net $18.3bn worth in December – the weakest in six months and down from a record $54.4bn in November.

After reaching a seven month low against the euro and the pound, the dollar is slowly limping up. The dollar had suffered a setback with the IMF commenting on the record U.S. trade deficit and the urgent need to correct global imbalances by letting the dollar fall.

Another blow came in the form of the Federal Reserve's signal to end a two-year campaign of raising short-term rates. The currency market which is sensitively linked to the Central Bank and the short-term rates naturally reacted dropping the dollar by another 2 percent. Though the damage is not yet over, the dollar is expected to pick up in a slow but steady manner.

According to Sharada Selvanathan, currency strategist at BNP Paribas in Singapore, " Any correction in the dollar is going to be very limited."

For further details Read

In a recent speech, Ben Bernanke, Chairman of the US Federal Reserve Bank, indicated the Fed would continue to raise interest rates in the near-term in order to rein in inflation. His words were supported by producer price data, which were released earlier in the day. The data suggested that prices of raw materials are rising, and, thus, the economy would benefit from additional rate hikes. For dollar bulls, this announcement provided a windfall, as the USD has become dependent on a wide interest rate differential to sustain the US current account deficit. The Wall Street Journal reports:

During the New York morning, the dollar…rebounded as the market factored that the core rate, which excludes volatile food and energy prices, rose more than expected. It climbed 0.3%, well above the 0.1% that economists had anticipated.

Last week, the USD registered solid gains against all of the major currencies, a feat that is not likely to be repeated this week. On one hand, currency traders continue to expect the USD to benefit from rate hikes and an increase in long-term treasury yields. On the other hand, a cascade of economic indicators are slated to be released this week, most of which are dollar-neutral or dollar-negative. Of primary importance is retail sales data, which serve as proxy for the consumption component of GDP and are expected to be lukewarm. Current account data will also be released, and will serve as a reminder to currency traders of the growing dependence of the US on inward foreign investment. In short, the USD is being pulled in multiple directions, and will likely remain range-bound in the near-term. The Wall Street Journal reports:

Recently, markets have ignored the ballooning U.S. trade deficit, focusing instead on the growing U.S. interest-rate advantage. However, Bank of America's Mr. Sinche said the massive expected deficit could help refocus the market's attention.

As far as currency traders are concerned, trade data is the most important in the spectrum of economic indicators. Economic theory suggests a nation's currency should appreciate when its balance of trade is positive, and vice versa. Accordingly, when the monthly report on US trade data revealed a decline in the US current account deficit, dollar bulls rejoiced. In fact, the deficit narrowed by 4.1%, its largest drop in several months. However, pessimists are predicting that next month's data will reveal a sharp expansion in the deficit, in order to compensate for this month. AFX News Limited reports:

For the long term, many analysts think structural considerations will become more of a concern to currency markets especially as the US Federal Reserve is expected to call a halt to its rate hike cycle by the summer.