Preview for November Trade Figures

[Neil]

by Ashraf Laidi

1/11/2005, Forexnews.comTomorrow’s release of the US November trade balance shall depend on whether the 5% drop in November oil prices (as measured by West Texas Intermediate) had been reflected in US in imports. This is largely due to the rising positive correlation between monthly petroleum imports and monthly total imports, which has hit 70% since January 2003 and 87% since January 2004.





In previous monthly declines of oil prices, a decline in oil imports was not reflected until the following month as oil- purchasing contracts tend to be locked in for periods longer than on a monthly basis, thus unable to reflect the month-to-month changes. If that is the case, i.e. if the November price drop had not been reflected in imports, then we see imports maintaining their upward course, gaining as much as 3% accompanied by a 2%, rise in exports, leading to a new record trading deficit of as much as $58 billion.

If in the unlikely event the November oil price drop were reflected in US oil imports, then we project a 1% drop in total imports and a 2% rise in exports, dragging down the November trade gap by 6% to around $52 billion from October’s $55.5 billion.

Nonetheless, it is possible that if the first scenario did materialize and the trade deficit surged to a new record, then traders could well rationalize the figure to be a largely a result of high oil prices, in which case it would be regarded as a temporary phenomenon and begin to bid the dollar. Thus, it is important to look beyond oil imports and into US exports with China, Canada and Europe. In the October report, aside from the soaring petroleum imports and the 3.4% rise in total imports, exports edged up a miserly 0.6% with the US bilateral deficit worsening across the board, with the exception of Japan. The trade deficit with China had pushed up 8% to a new record high of $16.8 billion, while that with Western Europe rose 27% to $9.9 billion after increasing 21% in September. The trade gap with Canada surged 20% to $9.3 billion, and the trade gap with OPEC rose 7.5% to $7.2 billion deficit with Japan slipped again by 5% to $5.9 billion.

Treasury Still in Benign Neglect for Dollar

Today’s rise in the dollar is an extension of yesterday’s movie resulting from Sec Treasury Snow’s comments indicating that market forces should determine currency levels, in which case is always a bearish sign for the dollar, given the secular bear market in the currency. Such comments are the reason why the currency market interprets the US Treasury’s policy to be that of benign neglect towards its currency regardless of how many times it states that a strong dollar is in the US interest.

Euro’s 3-step up, 1-step down

The chart below shows that the EURUSD rate has a tendency of retracing 50% of its major up moves before continuing the uptrend. The first two scenarios (see first 2 squares) show that the euro pulled back as much as 50% of the up moves before regaining its upward momentum. Thus, the next key support stands at $1.3019—the 38% retracement of the major rally from $1.1986 to $1.3664 (see third square). A breach below $1.3000 will be instrumental in generating an overshoot in favor of the dollar, since that would breach the periodic 38% retracement rule of the EURUSD. A breach below $1.2946 will give us the key foundation of $1.2816, which is the 50% retarcement of the $1.1986-1.3664 move.

- January 11, 2005

by Ashraf Laidi

1/11/2005, Forexnews.com