Forex Gump's  Instablog

While all eyes were focused on the tragedy that struck Japan over the weekend, we seem to have overlooked more upbeat developments in the euro zone.

In a way similar to, but a notch less cool than that infamous rooftop scene in comedy movie "The Hangover," European leaders made a pact dubbed "Pact for the Euro" in the wee hours of Saturday. In a nutshell, the pact is basically an agreement on a long-term program to fix the economic imbalances in the region.

Below is what I imagine notes would look like from the meeting:

Of course, each country has the freedom to select which courses of action to take to ensure it meets the region's goals. However, they will all be monitored according to the same criteria: wage and productivity developments, labor market progress, public finance sustainability, and financial stability.

I took a peek at the next page of the notepad to find out how they plan to achieve their goals:

Does this pact sound familiar to you? Well, it should! The idea came from the"Pact of Competitiveness" spearheaded by euro zone hotshots Germany and France a few months ago. Recall that, under this proposal, several measures were aimed at strengthening the euro zone economy in the midst of a debt crisis. These measures included laws for debt limits, tight budget controls, a higher retirement age, and a minimum corporate tax rate.

Naturally, these tight guidelines were met with plenty of opposition, particularly from smaller EU states. Several leaders worried about losing their sovereignty if they give in to the rules set by the top guns in the region. Come to think of it, wouldn't it be unfair to subject everyone to the same set of standards when each country is facing its own set of problems?

Although German Chancellor Angela Merkel assured that the pact was more of a guidelines than actual rules, the rehashed "Pact for the Euro" was met with similar criticisms. Just the same, Merkel and her buddy French President Nicolas Sarkozy tried their best to convince their fellow heads of state that the new pact is aimed at promoting cooperation among the EU members.

Many are unconvinced that the "Pact for the Euro" is the solution to the euro zone's growing list of problems, but this still looks promising for the region. Recall that last Friday the euro gained on its major counterparts when markets thought that EU leaders were a few steps closer to reaching agreements for the pact. Heck, EUR/USD climbed by 114 pips!

The optimism probably comes from the thought that a pact may iron out a few issues within the euro zone clique. For one, an agreement might prevent debt-ridden countries like Greece and Ireland to sink deeper into debt by giving them lower borrowing rates for their loans. Also, a set of rules can help other euro zone countries prevent another debt crisis or at least help them survive another one.

Aside from its economic benefits though, a euro zone pact would also address the region's "design flaw" of not having common economic policies. After all, how can a group of countries share a common currency and not share economic policies as well? A united front on economic policies would go a long way towards reassuring investors of the monetary union's stability, and might even support the euro in markets.

Now that the wheels have started churning for the "Pact for the Euro," markets will be watching closely to see if euro zone leaders are in it to win it. Granted, the agreement is only at its initial stages and still has a lot of ground to cover, but we can't deny that it's a step in the right direction.

Not even the U.S., which is the current topnotcher in terms of GDP, was spared from a negative trade figures in January. See, even giants are prone to weaknesses!

However, Uncle Sam's trade deficit wasn't much of a surprise since their trade balance has been in the red since bell-bottoms were in style! China, on the other hand, has been enjoying a healthy trade surplus for the past eleven months only to see this winning streak come to an end last month.

It turns out that exports slid by an annualized 2.4% in February while importsrose by a staggering 19.4% year-over-year. Since imports outpaced exports by a mile during that period, China's trade balance revealed a 7.3 billion USD deficit, which is a huge step down from the 6.5 billion USD trade surplus in January.

Let's take a closer look at the components of the report to find out why China's trade balance ran all out of love in February.

Higher prices of commodities played a huge role in tipping China's trade balance to the red, just as it did with Japan's trade figures. Skyrocketing oil prices, which comprised roughly 10% of China's imports, was one of the major culprits for the surprise trade deficit.

Still, economic gurus said this is no cause for alarm. Chinese trade activity typically slows down during the first couple of months of the year because of all the Lunar New Year festivities. It's customary for businessmen to take extended vacations in February, temporarily taking a break from shipping their products abroad in order to pay tribute to the Chinese gods of luck and prosperity.

Besides, manufacturing firms usually stock up on imported raw materials during the start of the year, gearing up for increased production later on.

While these seasonal factors hint that China's trade shortfall was probably just a blip, there's still the possibility that this deficit could widen in the coming months. For one thing, the commodity price rally has yet to run out of steam, which means that higher oil prices could contribute to another surge in imports. Bear in mind that, as I pointed out in my article about Japan's trade balance, the turmoil among the oil-producing nations in the Middle East still hasn't boiled over until now.

On top of that, the effects of the Chinese central bank's shift to a more prudent monetary policy stance could kick in during the coming months. You see, higher interest rates make it more expensive for firms to borrow money for business investment and expansion. This means that manufacturing industries could feel the pinch and start exporting fewer "Made in China" products around the world.

Sure it all sounds like gloom and doom for the Asian giant, but here's a theory:What if this was China's way to keep the U.S. from bullying them into adopting a loose exchange rate policy?

*Gasp*

Although the issue of China's undervalued yuan has taken the backstage for a while, U.S. lawmakers are still figuring out how to pressure China into giving up its unfair advantage in trade. But now that China announced a weak trade figure and showed that they too are vulnerable to rising inflation, naysayers might be forced to retreat. How can they insist there's a global trade imbalance when China's trade balance is in the red, just like everyone else's?

While I'm inclined to believe that China didn't print a surprise trade deficit on purpose just to shake off them haters, I have to admit that it's not such a farfetched idea. Another month of negative Chinese trade figures might just do the trick and bury the issue completely. A trade deficit doesn't seem like much of a curse now, does it?

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