Blog

Volatility in world trade playing out in currency values and commodity prices

0 2229 Market Intelligence

Alex Carrick

Positions:
Alex Carrick is Chief Economist for Reed Construction Data. He specializes in economic forecasting and statistical services.

Economists

Huge trade imbalances (China and Japan in surplus and the U.S. in deficit), ongoing European sovereign debt worries (Greece, Ireland, Italy, Spain and Portugal) and the U.S. Federal Reserve’s plan to print more money ($600 billion) are playing havoc with currency markets. The ramifications on individual nations’ gross domestic product (GDP) growth rates can be severe.

The U.S. goods and services trade deficit pulled back to USD $528 billion (annualized) in September, according to the Census Bureau. The deficit was almost $600 billion in June, but it has been less onerous since then. At its worst, the U.S. deficit touched $800 billion in June 2008 and several times from mid-2005 to mid-2006. Its best level was -$300 billion in February 2009. Huge trade imbalances (China and Japan in surplus and the U.S. in deficit), ongoing European sovereign debt worries (Greece, Ireland, Italy, Spain and Portugal) and the U.S. Federal Reserve’s plan to print more money ($600 billion) are playing havoc with currency markets. The ramifications on individual nations’ gross domestic product (GDP) growth rates can be severe. The G-8, and by extension G-20, are embroiled in questions relating to government fiscal balances and foreign trade/current account surpluses and deficits. Free floating currencies are supposed to provide an automatic adjustment mechanism. But many countries have either fixed exchange rates or intervention-prone adjustable. Almost half (47.5%) of the U.S. trade deficit is with China. Hence Washington’s persistent calls for Beijing to let the Yuan rise higher faster. The U.S. trade deficit with China set a record in August, but eased back slightly in September. The Federal Reserve’s plan to increase the money supply by $0.6 trillion has been pushing the value of the U.S. dollar down. Leaving aside questions about pride, it has apparently stimulated U.S. export sales. Aircraft shipments played a role in September’s higher export numbers. The U.S. has also been benefitting from raw material sales to emerging nations. Some of this has been agricultural in natural. Some has been to help out with foreign infrastructure building plans. To go along with the better news on the U.S. foreign trade front, initial jobless claims for the latest week ending November 6 were an encouraging 435,000. Since this was well under the benchmark figure of half a million, below which new hiring exceeds new layoffs, there is reason to believe October’s employment gain (+151,000 jobs) will be extended in the months ahead. Canada’s merchandise trade deficit continues to be a significant problem. The deficit with the world other than the U.S. is not particularly out of the ordinary. But Canada is used to running a substantial surplus with the U.S. and that has almost disappeared. The annualized surplus with the U.S. in October was only CAD $19 billion. Prior to the recession, it was $100 billion-plus. Canada’s trade surplus in energy products (+17.3% year to date) has picked up due to the gradual improvement in the U.S. economy. Industrial goods exports (+20.5%), which include mining products, are well ahead of last year but are almost matched on the import side. Forestry products are not contributing nearly as much as usual due to the ongoing weakness in U.S. housing starts. The machinery and equipment category is where Canada’s trade shortfall is most readily apparent. The hope is that Canadian corporate concerns are taking advantage of the climb in value of the Canadian dollar to buy more technologically advanced means of production. Volatility in world trade is playing out in other areas than just currency. Some commodity prices have become so volatile that margin requirements are being increased to cut down on speculation. Cotton prices are setting all-time records. Silver (up two-thirds since January), soybeans, white sugar and coffee are other commodities skyrocketing heavenward in late 2010. Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

Leave a comment

Or register to be able to comment.