FxWirePro: Narrowing U.S. trade deficit energizes USD bulls

The possibility of a narrower trade deficit in the United States in 2019 have significantly energized the USD bulls, as narrowing of a trade deficit is not only positive for the currency over the longer horizon, it creates a shortage of the currency funded through its current account deficit in the shorter term (more than a year). The narrowing of the trade deficit is of utmost importance, if that currency is the world’s primary reserve currency, used in almost 40 percent of global transactions.

Last night, U.S. Commerce Department released November trade statistics, which shows that the goods trade deficit has declined significantly in November, largely due to deficit decrease with China. However, despite the sharp narrowing, the U.S. trade deficit with China and the rest of the world would be larger in 2018, compared to previous years. See chart for greater clarity, all data currently delayed due to U.S. government shutdown, which temporarily ended until February 15th.

In addition to the narrowing of trade deficit, the declining interest rate expectations in Europe, other countries like Australia, along with U.S. economic divergence are also fueling the current USD rally.

The U.S. dollar is up for the six consecutive days after bottoming around 95 area. Currently, the index is testing crucial resistance above 96 area. Though it might retrace some of the gains made from this level, we expect the USD to rally to sustain longer than just this week.