US Trade Balance Improves, Net Exports to Help Q4 GDP

The US trade deficit in November was considerably smaller than expected and it will encourage economists to revise up Q4 GDP forecasts.  

The headline deficit fell almost 13% to $34.3 bln.  Exports rose by less than 1%, but still stand at a new record high.  Imports fell 1.4%, partly reflect a decline in oil imports, which fell to a 3-year low.  The US oil deficit stands at about $15.2 bln, which is the smallest since May 2009. 

When adjusting for prices, the real deficit, which is important for GDP calculations fell to $44.1 bln, the smallest in five months and is below the Q3 average.    

The dollar reacted favorable to the news; ticking back toward the session highs against the yen, with the euro slipping a tad.   

The greenback moved back above CAD1.07 on the divergent trade performance.  The better than expected US figures contrasted with Canada's trade deterioration.  The C$940 merchandise trade deficit was nine times larger than the Bloomberg consensus forecast.   Moreover, the Oct figure was revised sharply to show a deficit of C$908 mln rather than a C$75 mln surplus.    Exports were unchanged, though in volume terms they slipped by 0.7%,  while imports increased slightly, though in volume terms were unchanged.  This shows some deterioration in the terms of trade.   The trade surplus with the US narrowed to C$2.8 bln from C$3.1 bln.    

The US dollar saw a high near CAD1.0740 before Christmas and this is the immediate target.  Longer-term, we expect additional weakness in the Canadian dollar.  Our "trade of the year" is a NAFTA trade--long Mexican peso short Canadian dollars.