The Bank of England made no change to its benchmark interest rate; and they made no comment about the economy in the wake of this week’s monetary policy meeting. No surprise there.
The British pound, however, was already under pressure because of a larger than expected trade deficit reported today. Here are some key points from Reuters:
- Biggest goods trade gap since comparable records began in Jan 1998. Deficit not exceeded since trade data started in 1697, although data before 1998 was not collected on an identical basis.
- Biggest total trade gap (goods and services) since Aug 2005
- Biggest non-EU goods trade deficit since Jan 2010
First, this appears to be yet another straw that leaves the pound looking unstable under the weight of its economy; this figure will subtract from Q3 growth. Second, the increase in imports combined with the decrease in exports and the resultant “worse-than-expected” deficit cloud what could be taken as an uptick in domestic demand which could signal that there is some desire among Britons to spend (a positive sign). On the other side of the equation, growth in exports to the US slowed; and exports to Germany shrank.
UK Exports to US and Germany:
As so many analysts continue to wonder whether decoupling from the US is a real possibility, the UK exports to the US are important for their obvious global demand implications. Exports to Germany, too, are important because of the rebalancing that needs to take place among the Eurozone economies – Germany, running a surplus, needs to crank up demand because deficit countries in the zone have little remaining financial flexibility with which to create demand.
For good measure, growth in German exports to the UK did slow July, helping to balance trade between the two countries. The fact that UK imports from Germany seem to be topping out might be an encouraging sign for Eurozone rebalancing efforts.
UK Imports from Germany:
In Canada, on the other hand, the Central Bank just announced a 25-basis point interest rate hike. It was somewhat expected and overall bullish for the Canadian dollar yesterday. And today Canada also reported their July trade balance:
Canada's trade deficit widened more than expected in July as exports to the United States sank because of anemic demand while overall imports surged to their highest level since November 2008 ... Canada's trade surplus with the United States narrowed to C$1.2 billion in July from C$2.4 billion in June as the stumbling U.S. economic recovery reduced demand for Canadian goods. (Reuters)
What’s important for Canada is exactly what this Reuters excerpt highlights: trade with the US. Easily Canada’s largest trading partner, the US plays a big role in the prosperity of the Canadian export market and Canada’s economy in general ... to a much greater extent than most other countries.
Today’s data was no doubt a softer trade number than what analysts had expected for Canada. The key will be whether or not traders bite on the bit of data that shows US demand is waning again. That would be critical for risk appetite.
As Canada’s economy is in a better position than the UK economy, the Canadian dollar very likely outpaces the British pound ... especially in an environment where global economic recovery sentiment is, well, recovering.
John Ross Crooks III
Black Swan Capital LLC
Disclosure: No positions.