It seems hard to believe markets can be cheered by a quarterly current deficit of $-81.1B but then again everything is relative. That is what was reported today for the 4th quarter 2013 US current account. Remember, the current account balance is a summery of the goods and services exported minus the imports of the same categories.
No doubt the $81.1B current account deficit is a large number but this quarter's current account balance is the smallest since 1999. Further the current account deficit is down to 1.9% of GDP from 2.4% last year. In 2005 this percentage was up to 6.5%. This still means the US is living beyond its means, and the deficit must be offset with either loans from abroad or investments made by foreign interests into the US.
The US deficits started to grow in the 1970s when the cost of oil sky rocketed. The result was a gigantic transfer of wealth from the US and other developed countries to the oil producing countries, mostly in the Middle East. Soon, the oil rich countries then had far more wealth than they could consume. Consequently they became lenders and investors in the developed world.
Ironically, the trend is now turning, in part because of the shale revolution in the US. New techniques for extracting oil and gas in the US are now reducing the importation of energy, also resulting in the export of refined energy products, and is partially responsible for the changing US current account numbers. Still, there is much more the US could do to increase its energy production.
There is nothing like a good crisis to foster change. Putin's seeming revival of the cold war may be just such an action to hasten the growth of US energy production. Europe has long relied on Russia to supply as much as 50% of their needed energy. Clearly they will be held hostage to the unpredictable demands of the Russians should they not secure other energy sources.
Logically the US is in a position to become a major energy supplier to Europe. Development will take time and the current US administration must alter policies that will encourage rather than restrict the production of oil and natural gas. Should this happen the current account balances could continue to narrow. When that happens, gradually the surplus supply of dollars will contract, and the USD will firm, other things remaining the same.
It is interesting to compare the US current account numbers with the number in Britain, as did Ambrose Evans-Pritchard in the Telegraph:
Sterling has ratcheted higher to $1.66 against the dollar, a tad too strong for the Monetary Policy Committee. David Bloom, from HSBC, says sterling is all of a sudden the "least ugly" currency in a world where even the Japanese and the Swiss are holding down their exchange rates. "There is nowhere else to go," he said.
Yet he also warns, like other City veterans, that this intoxicating moment is not going to last. "UK growth is surviving on fumes, driven by a consumer credit boom. Britain has an enormous trade deficit," he said.
What may matter more is a current account deficit running at more than 5pc of GDP over recent months, the worst in a quarter of a century and by far the worst of the G7. It is not a "healthy" deficit driven by imports of machinery. It is a consumption spree.
This comparison of current balances is not a good reason to sell the pound and buy the USD. These are both long-term indicators. Still, when traders take positions based upon their projection of the bank rates going out for over a year, that too seems foolish.
Looking at the current chart of the GBPUSD, (UUP, UDN, FXB) the pound seems to be tiring in its attempt to move to the topside of the 1.66/68 area. Yesterday the GBPUSD weakened and was trading under the 50 day SMA for the first time since Feb. 11. When it last visited this price the bulls bought and a rally back to 1.68 followed.
As we have pointed out in the COT Reports, the specs hold a large (41.4K contract) long position in the pound. Recently the sideways meander of the pair may be testing the patience of the bulls. We would be tempted to try the short side of the pound on a rally above the 1.66 handle. We do not wish to give the impression the current account of a country is a reason to take a position, but in this case we merely think the bull run, over 2000 pips since last July, may have run its course.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.