The US trade deficit declined in February and traders took the data as a signal US growth may be weaker than expected, bidding the euro higher as the EUR/USD moved to a new high.
For the month of February the US trade deficit shrank to $45.8B from $47.0B in January. The January numbers were revised up from a preliminary reading of $46.3B. Economists had forecasted the February numbers to show a deficit of $44.1B. The larger than expected gap may be attributed to higher energy costs as crude oil prices rose as high as $100 towards the end of the month. Imports rose at the brisk pace of 5.4%, the largest climb since 1999.
When factoring out inflation as is the measure for GDP numbers, the data shows the deficit shrank to $49.5B from $50.3, indicating Q1 growth may be on the light side of forecasters’ range. However, next month’s report may see a decline in the trade deficit as the effect of a weakening dollar may boost US exports with dollar priced goods relatively cheaper versus their international competitors.
Traders took the opportunity to bid the euro higher, pushing the EUR/USD above the 1.4500 level for the first time since January 2010. The strong bids for the euro were seen despite disappointing German economic confidence as shown by the ZEW Sentiment. The survey posted a decline to 7.6 from last month’s reading of 14.1 in March. Forecasts were for a decline to only 11.7. Increasing commodity prices were cited for the pullback.
Strong bids for the 17-nation currency have been predominant as US central bankers have strengthened their resolve to carry out the full QE II program as highlighted by comments from FOMC member Janet Yellen.
Yesterday’s pullback in risk only brought temporary gains for the greenback as Japan signaled a further deterioration in earthquake damaged nuclear reactors. As the risk on trades stay at the forefront of asset managers’ portfolios, the euro should stay bid.
Initial resistance for the EUR/USD rally should be the January 2010 high at 1.4580. This is a level that coincides prior to the beginning of the Greek debt crisis A close above this level, specifically on the monthly chart will be extremely beneficial to upside momentum and would set the stage for a rally to the November 2009 high at 1.5140. To the downside, the rising trend line off of the January low comes in at 1.4200 today.
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Russell Glaser is a Currency Analyst with ForexYard. Russell provides analysis in the FX spot market by employing fundamental research methodologies. In addition to currencies, Russell closely follows the correlation between the Commodities market and the movement of equities. His writings have been published on the ForexYard Trading Blog and associated partner sites. Prior to joining Forexyard, Russell Glaser served as a management consultant in the financial services industry, advising Fortune 100 companies. Russell holds a degree in finance from the Fisher College of Business at The Ohio State University.
