Erratic Reaction in Forex After US and CAD Trade Numbers

U.S. and Canadian trade numbers for the month of January were much stronger than the market had anticipated but weakness beneath the U.S. trade report's headlines pushed the U.S. dollar sharply lower. Even though the U.S. trade deficit shrank from -$39.9B to -$37.3B, exports fell for the first time since April. Imports also dropped by 1.7 percent, the largest decline in 11 months.

The contraction in imports and exports reflects weak demand both internationally and domestically. More specifically, import and exports of automobiles have decreased as the incentives offered by governments around the world to buy cars begin to fade. This mix is negative for the dollar because it does not play into the growth story. A smaller trade deficit is only dollar positive if it involves a larger increase in imports and a smaller increase in exports. What is particularly worrisome is that Americans imported the fewest barrels of crude oil in 10 years. Traders were also slightly disappointed by the jobless claims numbers which showed a smaller decline in the jobless claims and higher continuing claims. We don't believe that traders should make too much of the jobless claims numbers because weekly claims are still at the lowest levels in 2 months and continuing claims increased only because they fell to the lowest level in more than a year the prior week. With a strong U.S. retail sales report expected tomorrow, the weakness of the dollar should be limited.

Meanwhile the Canadian trade balance rose from 0.1B to 0.8B. Originally, Canada's trade balance was expected to return to surplus in January but there was an upward revision to the prior month's report. A 0.5 percent gain in exports was fueled by shipments of industrial products and energy while the 1.7 percent decrease in imports was due to a drop in domestic demand for energy and machinery. Aside from the trade numbers, capacity utilization increased from 68.7 to 70.9 percent which indicates that productivity is increasing. House prices grew 0.4 percent, right in line with market expectations and in line with strong recovery in the housing market.