USD/CAD: US Trade Deficit Shrinks, Canada Reports First Deficit in 32 Yrs

Last updated 2/11/2009 8:53 AM ET (GMT -5) 0 Comments - Add your comment

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Kathy Lien

Director of Currency Research, GFT

December trade numbers were released from both the US and Canada this morning. The narrower trade deficit in the US was not much of a surprise since the US dollar weakened in the month of December and the export component of manufacturing ISM increased, foreshadowing a better trade number.  In the US, both imports and exports declined.  A shrinking trade deficit is the new trend in the US and the deficit may even turn into a surplus if Washington is successful at promoting "Buy American."  Recessions always fuels protectionist mentalities to the sharp criticism from nations abroad, and protectionism is the way the US is leaning right now. The deficit narrowed from -$41.6B to -$39.9B.  In any other economic environment, this would be positive for the US economy, but the shrinking deficit now represents more weakness than strength.  

Canada, First Deficit Since March 1976

The bigger story is actually in Canada who reported its first trade deficit in 32 years.  Their surplus of 1.2B turned into a deficit of -0.5B in December. Unsurprisingly, the slowdown in the US and the decline in oil prices have pushed exports down 9.7 percent.  Imports also declined for the second consecutive month and given the deteriorating labor market, consumer spending will probably contract even further.  Countries like Canada and Japan who traditionally run a trade surplus are being hit from all angles.  This changes the landscape for those countries and could lead to less demand for Canadian dollars and Japanese Yen going forward.  

USD/CAD Headed Higher?

From a trade flow perspective, a shrinking deficit in the US and an increasing deficit in Canada could spell more gains for USD/CAD.  The currency pair is currently trading right below our Bollinger Band buy zone and if it closes above 1.2515, we could see a move to 1.25

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.