Forex Blog - Forex News & Currency Analysis

Following last week’s string of wild events that sent the Forex Market into a volatile state, this week seems to be relatively calmer. However, nothing is ever smooth sailing in the Forex industry – and the slightest event could send the market, and some of the main currency pairs into a chaotic fit.

Already this week, the UK, the US, Canada and Germany are scheduled to release their Trade Balance. In the wake of the financial crisis and the recession, exports have taken on a new importance as policy-makers are hoping that they will form the basis for future economic growth, rather than the consumer-led credit boom seen during the preious decade.

The balance of trade (or net exports) is the difference between the monetary value of exports and imports of output in an economy over a certain period.  A trade surplus occurs when a country exports more than it imports, while a trade deficit (also known as trade gap) is when a country imports more than it exports.

Yesterday morning, both Germany and Britain announced their Trade Balance for December of ‘09. Germany’s exports unexpectedly jumped, for the fourth consecutive month, as the global recovery bolstered demand for goods from Europe’s largest economy. Last month Germany trade surplus reached an 18 month high of 17.0B- while the report this morning showed a slight contraction in the trade surplus, the balance still came in higher than expected at 16.7B.

A few hours later, the spotlight moved across the Channel, where the ONS reported Britain’s trade balance had continued to widen reaching a deficit of 7.278 billion pound, for December of 2009. Economists had predicted that the trade gap would shrink to 6.6 Billion, from its previous level of 6.8Billion; instead Britain’s trade deficit widened to its highest in nearly a year, as imports from non-EU countries shot up at their fastest rate since March 2005. The expectation that the British trade deficit would shrink, was based upon the logic that as the Pound has substantially weakened in value Therefore, it would become cheaper for overseas traders to import both British goods and services- sadly this was not the case, and despite a depreciated currency, the UK’s trade deficit continued to grow.

Later today, both Canada the US will simultaneously publish their trade balance. For the past year Canada’s trade balance has been hovering around the cross roads between a trade surplus and a trade deficit- each month or two jumping back and forth over the threshold. With the Canadian trade balance on the cusp on re-entering the land of a surplus (prediction of -0.1B), the US trade balance still remaining well within the land of the deficit, is predicted to contract slightly from -36.4B to -35.8B. While most might think that a contracting trade deficit is beneficial for a country and reflects a healthy economy- this is not necessarily the case with the US.

If the US current account deficit were to be reduced, it would be a direct result of foreign investors no longer willing to accept U.S. Dollar denominated debt - which is being used to finance the current account deficit. As a result the current account deficit would shrink as foreigners would be less willing to sell goods to Americans in exchange for U.S. Dollars. If foreigners decide they do not want to hold any more U.S. Dollars, the exchange rate would fall as with anything else, if the demand for a good goes down, so does its price. So a falling U.S. trade deficit would lead to falling demand for the U.S. Dollar, leading to a depreciation of the U.S. dollar on foreign exchange markets.

Tomorrow at 1:30pm GMT the Forex world will suddenly turn silent, as the US Bureau of Labor Statistics announces the Change in Non-Farm payrolls for January. Whether or not the change in this critical report is better or worse than expected, the forex market will immediately enter into a sea of volatility.

The fact that this one report has such a strong impact on the market, leaves us asking what does this report even mean? In Short, the Non-Farm payroll is defined as the change in the number of employed people during the previous month, excluding the farming industry. It represents the total number of paid U.S. workers of any business, excluding general government employees, private household employees, employees of nonprofit organizations that provide assistance to individuals, and farm employees.

For the first time in a long time, analysts are expecting an increase in the Non-Farm payrolls of 10K- meaning that they are predicting that 10,000 more people will have been employed this January, than in December (of 2009). For such a small number, what is all the hype about? While this number appears small, it is a tremendous step for the U.S economy. For all of 2009, the Change Non-Farm Payroll was continuously negative- the fact that for the first time in over a year, the report is finally predicted to show an increase in employment, thus further supporting claims that the U.S will finally exit the recession.

Tomorrow’s release of the NFP, followed by the US unemployment concludes one of the busiest weeks in the forex world. Investors are advised to closely watch this report. A lower than expected increase in the NFP, will surely cause the dollar weaken against its major counterparts, wiping out some, if not all, of this week’s gains. While, a better than expected change in the report, will not only send the USD spiraling upwards, but it will final confirm that the U. S is in fact on the path to financial recovery.