China vs US Trade Balance and Forex Fallout
Two major sets of data that could impact forex markets this week are US and Chinese trade data. Currency flows tied to trade have a direct impact on currency pairs, and given that these are the two largest economies in the world, they will likely affect other currencies as well. On top of that, trade numbers are an important indicator of economic health, which lately has been a more important indicator for currencies than monetary policy.
For the upcoming data, the market is likely to focus less on the headline numbers and more on what they imply about the impact of tariffs, the future of the dollar and what it means for commodity currencies. One major factor is whether China’s central government will increase stimulus measures, which could boost the Aussie dollar. In fact, the NZD and AUD are among the more sensitive currencies to the upcoming data, but so is gold, as China is the largest importer of the safe-haven metal.
What the Market is Looking For
The consensus is that the US will report a slightly smaller trade deficit on Tuesday, with the focus being on the variation in imports and exports. If the trade deficit is markedly higher than the $77.6 billion last month, it could weaken the dollar. Total US imports are anticipated to ease to $385 billion from $395.3 billion a month ago, while exports are projected to drop to $312 billion from $317.7 billion. That trade in both directions declined is a sign of slowing economic activity, even if the overall deficit is less negative. Therefore, it could be seen as negative for the dollar as well.
China is expected to see a drop in its trade surplus to $105 billion, down from $125.6 billion in June. However, again the focus will be on the flow of trade. Last month, imports jumped 36% compared to a year earlier, while exports rose only 27%. Markets are anticipating a similar mix, suggesting that China is still buying substantial amounts of raw materials. That would be crucial for the AUD.
Tariffs, Trade and the War(s)
Recent analysis notes that US goods trade with China has narrowed substantially, forcing the Asian giant to expand to other markets. The US has tried to reduce its trade deficit with China, and tariffs are one of the latest measures. The trend has so far seemed to work, but it has also led China to diversify to other markets.
The size and direction of the trade deficit could be an indicator for policy, as it would show whether tariffs are working. If that’s the case, the US could double down on the trade war, which would likely support the greenback but weigh on antipodean dollars. The asset that could see even more benefit in this scenario is gold.
Risk Appetite Shifts
The most immediate way the data could affect forex markets is if they suggest an acceleration or slowdown in the world’s two largest economies. Better trade numbers would likely support risk appetite and boost export-oriented and higher-yield currencies, like the AUD and CAD
Meanwhile, disappointing trade numbers could bring back the spectre of economic worries and weigh on more speculative currencies. To the upside, gold could also benefit, particularly in conjunction with a weaker dollar.
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