The Big Picture

The US trade data usually isn’t market affecting, and indeed yesterday’s US trade data for November didn’t have an immediate impact on the FX market, but it gradually lifted the dollar as economists started to consider its implications for growth. The deficit narrowed sharply to USD 34.3bn from USD 40.6bn, far better than market expectations of USD 40.0bn, as exports reached a record high (+5.2% yoy) and imports declined (-1.1% yoy). Most of the improvement in the goods trade balance was due to petroleum; exports are rising and imports are falling due to increasing US domestic oil production. The US Energy Information Administration said that US oil production in 2015 should be at a 43-year high – so much for “peak oil” in the US – and the top Republican on the Senate Energy Committee urged an end ban on exporting crude oil. That means the prospect is for oil to cause further improvement in the trade balance in the future as well. The important point for the FX market yesterday was that many economists revised up their Q4 GDP forecasts due to the improvement in the trade balance. As those revisions started filtering into the market, the dollar strengthened generally. It’s higher this morning against CAD, JPY and CHF, while falling against NOK and NZD. This fits into the thesis I put forward in my 2014 outlook that the stronger growth forecast for the US in 2014 would be one of the main drivers of USD strength this year.

The CAD was particularly weak as the country registered its 23rd consecutive month of trade deficits and the Ivey PMI (the Canadian PMI survey) plummeted to 46.3 from 53.7 (market expectation was for a rise to 54.5). The trade data is particularly worrisome because it appears that the traditional relationship between a strengthening US economy and rising Canadian exports to the US is weakening. In case traders weren’t convinced of the direction of USD/CAD, Bank of Canada Gov. Poloz said he was most worried about Canadian inflation undershooting its target.

Ireland’s auction of 10-year bonds went well yesterday; the country was able to sell more bonds than it had planned at a higher price than it had hoped for because of strong demand. The news helped other peripheral bond yields to decline as well. The better tone in peripheral European bonds encouraged some money that had flowed into safe-haven CHF to flow back into EUR and EUR/CHF rose as a result.

Natural gas prices were extremely volatile yesterday as record low temperatures were set across the US yesterday, but forecasts are for unseasonably warm weather later in the week. The near February contract, the most active one, ranged between +2.9% in early New York trading and -1.1% near the end of the New York day. At the time of writing it’s +0.8% up from Tuesday’s close. Watch the weather report for that trade.

The European trading day starts with current account data from Germany. The country’s trade surplus is expected to have risen to EUR 18.9bn in November from EUR 17.9bn in October, while its current account surplus is forecast to have risen slightly to EUR 19.3bn from EUR 19.1bn. German factory orders are estimated to have risen 1.5% mom in November vs a revised fall of 2.1% in October. This is an important number for the markets and could be EUR-positive. Eurozone’s retail sales are expected to rise modestly by 0.1% mom in November, a turnaround from -0.2% in October, while the Eurozone’s unemployment rate is forecast to have remained at 12.1% in November.

In US, the ADP employment data is forecast to show that companies added 200k employees in December vs 215k in November. That would be in line with the consensus forecast of around 195k for Friday’s non-farm payrolls. The relationship between the ADP report and the NFP is fairly random, though; over the last two years, the ADP has been higher 13 times and lower 12 times, with the average miss a large 43k. But it’s the best guide we have, which isn’t saying much. Also the Fed releases the minutes from the Dec.17-18 meeting, when the FOMC announced that it plans to start trimming its monthly bond buying to USD 75bn from USD 85bn. The market will read the minutes closely for further insight into the reasons behind the decision and any clues about how quickly the Fed will wind down the stimulus.