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Greenback Gains on Solid Trade, Services Data

Don Curren January 7, 2020

The US dollar advanced broadly in currency markets this morning after international trade and domestic service sector data both surpassed expectations, suggesting the economy continued to put in a solid performance at the end of 2019.

The data won’t likely move the needle with regard to the market’s expectations of monetary policy at the Fed. But they do provide some reassurance the economy remained relatively healthy in December despite the tumultuous global environment.

The trade-weighted dollar index was about 0.40% higher than Monday’s close after the Institute for Supply Management’s service sector index came in at 55, higher than the November reading of 53.9 and better than the expected 54.4.

The ISM’s manufacturing sector index for December was much weaker at a cycle low of 47.2.

Much of the greenback’s gain was achieved, however, after the U.S. Census Bureau and the Bureau of Economic Analysis reported earlier that the goods and services deficit was $43.1 billion in November, down $3.9 billion from the revised figure of $46.9 billion in October.

The US government agencies said the goods deficit decreased $3.9 billion in November to $63.9 billion while the services surplus decreased less than $0.1 billion in November to $20.8 billion.

The US trade deficit with China decreased $2.2 billion to $25.6 billion in November, with exports expanding $1.4 billion to $8.9 billion and imports decreasing $0.8 billion to $34.5 billion.

North of the border, a combination of soft Canadian trade data for November and decent US trade report for the same period was something of a double whammy for the Canadian dollar, with the loonie dropping by roughly 0.2% against its US equivalent after the release of the two trade reports.

Statistics Canada reported Canada’s merchandise exports declined 1.4% in November to 48.7 billion Canadian dollars, while imports were down 2.4% to C$49.8 billion. As a result, Canada’s merchandise trade deficit with the world narrowed from C$1.6 billion in October to C$1.1 billion in November, smaller than the expected C$1.15 billion.

But the details of Canada’s data were discouraging as both imports and exports slumped, with the deficit narrowing only because the decline in the former outpaced that in the latter.

The Bank of Canada has persisted in maintaining a neutral stance on monetary policy direction in recent weeks, but there’s some expectation in the market that a speech from Bank of Canada Governor Stephen Poloz on Thursday could signal a dovish tilt on monetary policy. A definitive signal of a substantial policy change is unlikely.

The Bank’s first policy announcement of 2020 falls on January 22.

In the US, interest rate futures markets are pricing in 90.6% probability that the Federal Reserve will hold its target range for the fed funds rate at 1.50% to 1.75% at its first policy announcement on Jan. 29.

Don Curren
Market Strategist and Content Editor