The global recession has caused a dramatic change in global trade. Countries that have traditionally ran trade surpluses are reporting trade deficits while countries that have traditionally ran trade deficits are beginning to turn trade surpluses. On Thursday for example, the U.S. reported its smallest trade deficit since 1999. Unfortunately the changes in global trade balances have been primarily driven by a sharp contraction in demand. Imports have been declining but the problem is in exports, which has plunged across the board. The only comforting factor is that everyone is facing the problems. On the most fundamental level, currencies move based upon supply and demand and trade represents some of the biggest supply and demand flows. Therefore the change in trade has and will continue to play a major role in the price action of a currency pair.

The big story in the financial markets today was not the improvements in economic data, but the improvement in earnings. The health of the financial sector is critical to the recovery in the U.S. economy and therefore investors are keeping a particularly close eye on the reports from the banking sector. In order for the global economy to have any chance of recovering, banks need to stabilize and start turning a profit so they will feel comfortable enough to lend. Therefore the better than expected results from Wells Fargo has been received positively by the equity and currency markets. The U.S. dollar sold off against the commodity currencies and rallied against the Japanese Yen. The dollar also gained strength against the euro and British pound, which is not in line with the improvement in risk appetite because of euro and pound specific reasons that we will discuss further in the respective sections.

This past week has been marked by recoveries in both the currency and equity markets thanks to better than expected U.S. economic data and reports of profitability from banks. Although the price action that we have seen thus far is still in line with a bear market rally, the move higher has been a breath of fresh air for many investors. For the time being, the downtrend in the EUR/USD has been broken. Even though the currency pair continued to edge higher, it remains to be seen whether the strength can continue. There are a lot of economic data due for release next week, but not before this weekend 3 big event risks – the G20 Meeting, OPEC Meeting and Bernanke’s first ever on-the-record television interview as Fed Chairman.