It’s 1980s All Over Again for FX Desks Looking at Trade Flow

  • Trump’s FX jawboning makes traders vulnerable to export data
  • China’s trade surplus with the U.S. slips to seven month low

Why a Too Strong Dollar Will Impact U.S. Momentum

Currency traders accustomed to analyzing the Fed’s dot plot and monthly U.S. jobs figures to divine the direction of the dollar are having to learn, or in some cases re-learn, a forgotten skill: how to scrutinize trade data.

It’s been decades since investors gave significant thought to the data amid easing trade tensions. What’s more, the flows represent a drop in the ocean for a currency market where about $5 trillion exchanges hands every day.

Yet now, with the dollar near a 14-year high and Donald Trump accusing countries including China and Japan of keeping their currencies weak to gain trade advantages, the risk is any widening in the U.S. trade deficit may prompt a reaction from the president and spur a dollar selloff. Trump seemingly held his tongue Friday after China’s monthly trade surplus with the U.S. slipped to a seven-month low of $21.4 billion, according to data compiled by Bloomberg.

That risk was put on display on Friday, when the yen surged briefly against the dollar after Trump said at a press conference with Japanese Prime Minister Shinzo Abe that he’s complained about currency devaluations "for a very long time," and that he’ll work "very hard" to make sure the U.S. and China are on a “level playing field” as far as currencies are concerned.

"The fact that the president is planning to do so much on the trade front which could potentially alter the global trading landscape permanently, forces market participants to focus on whatever trade data they can find," said Brad Bechtel, a currency strategist at Jefferies Group LLC in New York. "Although often a bit dated, trade data will have far more relevance going forward."

Trump’s summit with Japanese Prime Minister Shinzo Abe starting Friday was drawing the attention of dollar-yen traders like no such meeting since trade tensions preoccupied the nations’ leaders in the 1980s and 1990s.

So what data should currency traders follow?

Apart from the the U.S. Census Bureau’s monthly release (due March 7), investors should pay attention to the statistics from these seven nations: China, Japan (due Feb. 20), South Korea (due March 1), Germany (March 10), Taiwan (due March 7), and Switzerland (due Feb. 21). All were placed on the Treasury Department’s monitoring list last year when it evaluated the foreign-exchange policies of trading partners. Treasury cited instances of unusually large bilateral trade surpluses in the first four countries, and singled out Taiwan and Switzerland for engaging in interventions that only serve to weaken their currencies.

Chinese policy makers are already surveying domestic companies to evaluate the potential impact should the U.S. label the nation a currency manipulator and impose punitive tariffs, according to people familiar with the issue.

If you’re uninspired by the mundane official releases and frustrated by their backward-looking nature, Sebastien Galy, a strategist at Deutsche Bank AG, has a different recommendation: freight-rail traffic.

Incidentally, that’s the indicator Warren Buffett said he’d monitor if he was stuck on a desert island for a month and only had access to one statistic. The Association of American Railroads has weekly data for the U.S., Canada, and Mexico, the kind of high-frequency information that a currency trader could really sink their teeth into.

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