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Currencies React to Changes in Global Trade

Last updated 4/10/2009 7:40 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

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.   A perfect example is in USD/JPY.  The currency pair has appreciated dramatically since the beginning of the year and part of the reason is because the U.S. trade deficit is shrinking at very rapid rates while Japan’s trade surplus turned into a deficit in October.  

Two of the other dramatic changes can be found in the Australian and Canadian trade balances.  Australia turned a trade surplus in August while Canada posted a trade deficit in December.  This shift helps to explain the 19 percent appreciation in AUD/CAD since October.

 If you are curious, here are the charts for the trade balances in the other major countries.

*Source: fx360.com

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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.