am/FX: Trade Imbalances

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Looking at the forest, instead of the trees. Trade balance is an important broad representation of what’s going on.

by Brent Donnelly

August 23, 2022

Not dead.

Just splootin’.

Current Views

Short ES1 @ 4272

Stop loss 4366

Take profit 4010

Tuesday, August 23, 2022

Trade Imbalances

People are trying to separate a bunch of themes here: big moves in EU rates, upcoming Jackson hole confab, and the EU energy crisis. It seems to me the energy crisis is the story. Jackson Hole is more of a red herring. Powell will say whatever he says but the evidence shows his guidance is not credible and Fed policy is contingent on spot data. US CPI matters more than Jackson Hole.

With regard to positioning, people are confused. The price action might lead one to assume everyone is short EURUSD and GBPUSD, but I am not sure that is true. I think people are bearish and flat. FX participation and risk are limited as many are on vacation and many missed the EURUSD rally and don’t want to be short EURUSD sub-1.00. Amazingly, Citi’s FX positioning report shows market is short USD and long GBP (!), which seems hard to believe, but who knows.

If this is a structural repricing of the disappearance of the EU current account, there is no reason to think 1.00 means much. Maybe we just keep trending right into the end of the year as the German export miracle is no longer a thing, China slows, there is no obvious cure for the energy crisis until spring, QT in the USA doubles, risky assets do their best impression of Q4 2018 and so on. Here is EU trade since 1999:

EU trade with non-EU countries (1999 to now)

It’s not often I put trade balance data in here, but trade balances are on the move and it’s good to zoom out and see the big picture once in a while. On the next page, I show the trade balances for the other G10 majors. I forgot Sweden, but it’s a boring chart and I’m sure they won’t mind. Förlåt killar!

I had to split the countries into two charts because the y-axis becomes an issue if you combine them all. All data is in millions. Here are the smaller trade balance countries:

Trade balance for UK, Australia, and New Zealand since 2008

And the big ones:

Trade balance for Norway, Canada, Japan, and Switzerland since 2008

The main takeaway for all this is that these are epic moves. Trade balances are real drivers of currencies. When Germany buys LNG from Qatar (for example), they need to sell euros and buy USD. When oil goes to $100, Japan buys USDJPY in Asia time every night. And so on. As such, my gut says that it’s time to use your imagination on where EURUSD could end the year. Buy the dip doesn’t make any sense right now.

I also didn’t realize how much the NZ trade balance had deteriorated due to rising import prices. I suppose the permabid state of AUDNZD is partly explained by the trade balance divergence.