U.S. Trade Balance Strengthens

Daily Forex Fundamentals | Written by RBC Financial Group | Jan 13 09 15:04 GMT |

The U.S. trade balance improved to -US$40.4 billion in November following the prior month's -US$56.7 billion reading (revised from -US$57.2 billion). The market had been expecting a more muted improvement to -US$51 billion. Both exports and imports fell, with the latter outpacing the former leading to the smallest trade deficit since November 2003. Both exports and imports registered weakness leading to a 28.7% month-over-month improvement in the trade balance. Exports fell 5.8% month-over-month with all categories posting declines except the volatile aircraft component. Industrial supplies and autos were particularly weak, registering falls of 13.4% and 10.8%, respectively. Imports were even weaker falling 12% in November. All categories except aircraft posted declines. Of particular note was the 9.4% fall in imports of consumer goods, boding ill for personal consumption in the month. However, a good portion of the trade balance improvement is attributable to the fall in oil prices as the import price fell from US$92 per barrel in October to US$66.7 per barrel in November. This led to a fall in the value of imported petroleum to $22 billion from US$37.6 billion in the prior month. Nonetheless, the real goods balance excluding petroleum narrowed to -US$32.8 billion from -US$36.9 billion. Despite today's improvement in the trade balance, we expect fourth quarter U.S. growth to decline at a 6.1% annualized pace. Falling consumer and investment spending will exert significant drags on growth and these factors are likely to keep the economy in recession in the first half of 2009. However, the Fed's aggressive easing of monetary policy combined with the hearty dose of fiscal stimulus that is in the pipeline are expected to lend support to the economy in the second half of the year and we forecast that GDP growth will turn positive. Even with a mild recovery expected later this year, we anticipate that the Fed will leave its target Fed funds rate in the current 0% to 0.25% range throughout this and much of next year in an effort to put the economy on a firmer growth path and ensure that the recovery picks up pace in 2010. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.