The ever-pressing US trade account made a distinct about face in its read this morning, but deep pockets looked to dampen the dollars reaction. The lack of follow through in what would otherwise been a strong dollar run looks to been put off (or at least delayed) until the event risk in the afternoons FOMC announcement is settled.
Though price action, the caution ahead of the rate decision is easy to see. A 55-point range in the EURUSD, with a top near 1.3270 has set the tone. The dollar was slowly picking up against the yen through the morning hours in New York, with a touch on 117.20 after forming a temporary base on 116.70. With the help of strong UK data, the pound continued to march higher against the dollar, adding another 100 points to through the sessions high. Finally, the USDCHF is holding strong to 1.19, with a brief rally to 1.2050 providing the only action through the morning.
Despite the cautious stand across the dollar-denominated pairs, fundamentalists received a big surprise this morning with a surprise move in the trade balance. Going into the Commerce Departments release of the October trade account, the consensus among economists had already projected a $1.3 billion shave off of Septembers record $64.3 billion deficit. However, this mean estimate proved to be modest when the print across the wires flashed a sharp contraction to a 14 month-low $58.9 billion. This was the biggest drop in the long-standing shortfall in five years. Furthermore, a quick glance at the breakdown told traders that the large improvement was by-and-large the product of a big drop in imports. Exports for the month pressed on to a fresh record with a modest 0.2 percent increase to $123.6 billion. However, it was the 2.7 percent plunge in imports (the biggest decline since December of 2001) to $182.5 billion that moved the overall balance. Looking even deeper into the makeup of imported goods, it was readily apparent that the petroleum group was the outlier for the entire report. As was suggested in the Import Price Index some time ago, the biggest drop in the value of petroleum goods in 16 months was finally offering some level of relief to the trade account.
While this particular piece of the trade report had significantly changed the headline number, many of the same issues with component data that have raised concern before were still obvious. The shortfall with China was a particular balance that caught the eye of the currency market. Growing to a new record $24.4 billion deficit, China officially surpassed Mexico as the United States second largest trading partner. This account deficit aligns itself nicely with Fed Chairman Ben Bernankes and Treasury Secretary Henry Paulsons visit to the Asian behemoth this week. While this turn of events will undoubtedly be brought up, few expect the talks to amount to anything much in terms of a quicker revaluation of the yuan. Now traders await the Feds comments. While there was little change in the inflation scene since the last report, the market will look to see whether the contraction in the manufacturing will warrant any comment.
Equities were little moved through the morning hours as the market shrugged off the trade account. By 15:50 GMT, the NASDAQ Composite headed up a 0.21 percent decline to 2,437.62. Following suit, the Dow was off 0.11 percent to 12,314.62 while the S&P 500 was 0.4 percent lower to 1,412.50. The banking sector was on the move this morning after industry leader Goldman Sachs posted a 93 percent jump in net income. Though this was far better than the street had predicted, shares of Goldman still edged 0.7 percent or $1.33 lower to $201.19. Elsewhere, blue-chip Alcoa Inc. saw its own shares drop 1.5 percent to $30.57 after receiving a downgrade.
Treasuries were little changed through the morning hours in New York, though the trade report initiated a quick jump in rates as investors saw little impetus for a rate cut from the Fed. Ten-year notes were 2/32nds higher at 100-29 by 16:50 GMT with yields a basis point off at 4.51. Bonds had also advanced 2/32nds to 98-02 while its own yield was unmoved at 4.62.
