FX: Rapid Deterioration in North American Trade

Currencies are on the move morning with the EUR/USD rising to its highest level since March 2012. While it may tempting to credit the push higher at the beginning of the U.S. session to U.S. data, the euro's rise started before the 8:30 numbers were released. Also, USD/JPY barely budged which tells us that the primarily catalyst for the rally may not have been the U.S. trade number. Nonetheless, this morning's economic reports showed a rapid deterioration in North America trade balances. In the month of November, the U.S. trade deficit rose from -$42.1B to -$48.7B, its highest level since April 2012 and Canada's trade deficit rose to -1.96B from -0.55B, its largest since July 2012.

While the larger trade gap in the U.S. could cause a downward revision to Q4 GDP, the details of the report were not as nearly as grim as the headline number. Exports increased 1% while imports rose 3.8% to a record high in November. The strong demand for foreign goods reflects inventory stockpiling by U.S. retailers stocking up for the holiday shopping season. With the effects of Hurricane Sandy fading, demand for autos also rebounded. If not for the decline in oil prices, imports would have probably been even stronger and for the rest of the world, rising U.S demand is positive for growth.

Up North, Canada reported its fourth largest trade deficit ever. While imports also increased 2.7%, exports dropped 0.9%. As a country that is dependent on foreign demand, the decline in exports is bad news for Canada, especially since it is caused by weaker demand for energy and metal products. Exports to the European Union in particular dropped 19.4%. There have been a lot of inconsistencies in Canadian data recently with strong job growth in November and December failing to coincide with stronger economic activity. Yet with the IVEY PMI index rebounding in December after pulling back sharply in November, trade activity should improve next month.