This morning's larger than expected U.S. trade deficit barely
put a dent into the dollar's rally. The dollar is rising because
concerns about Europe returned after European and U.S. central
bank officials failed to provide any hope for investors this
week. They let 2 very high profile opportunities to tell the
world know that they are ready to increase monetary support slip
by, and currencies and equities have been punished as a result.
Fitch's downgrade of Spain added salt to the wound and now risk
appetite and the outlook for the FX market is in the hands of
European policymakers. Spain needs a bailout and the only
question is when they will finally admit it.
A larger than expected U.S. trade deficit won't change the
outlook for the U.S. economy or make the Federal Reserve any more
dovish. In the month of April, the trade deficit narrowed to
$50.1 billion from $52.6 billion. Economists had hoped that the
balance would rise back above -$50 billion but weak global demand
prevented that from happening. Along with the downward revision
to the past month's report, trade activity will contribute
negatively to GDP growth.
Up North, Canada also suffered from slower global growth as
the country's trade surplus turned into a deficit. For the month
of April, Canada's trade balance was -0.37 billion versus a
downwardly revised 0.15 billion in March. It was a tough morning
for Canada which explains the weakness in the Canadian dollar.
Aside from reporting a trade deficit, job growth slowed
materially while housing starts declined. After 2 solid months of
strong employment gains, only a mere 7.7k jobs were added last
month - nearly all of which were part time work. The unemployment
rate remained unchanged at 7.3 percent. Housing starts on the
other hand dropped to 211.4k from 243.8k. When the Bank of Canada
met earlier this week, they held onto their belief that it may
soon be time to unwind monetary stimulus. With asset markets
falling, oil prices declining and economic data weakening, it
will be difficult for them to justify one this year.