The trade balance in goods and services will be published by the United States Census Bureau on Wednesday at 12:30 GMT. After a sharp narrowing in the trade deficit in March, the shortfall is expected to hold near similar levels in April. The data will likely be watched closely ahead of the G7 summit on June 8-9, as the US President shows no sign of letting up his uncompromising stance in his fight to win more favourable trade terms from America’s partners.
In March, a record level of exports helped the deficit shrink from a more than a nine-year high of $57.7 billion in February to a 6-month low of $49.0 billion. The deficit is forecast to remain at $49.0 billion in April. The more sensitive trade gap with China also fell in March, narrowing by 11.6% to $25.9 billion as exports jumped 26.3% on the month and imports fell slightly.
However, whether this is the start of a new trend or just monthly volatility remains to be seen. An expected rebound in consumer spending in the second quarter will likely fuel demand for imports and push the deficit back up again as US households start to reap the benefits of the tax cuts. Furthermore, US exports may struggle to keep up the same pace of growth if America’s main trading partners such as the Eurozone and Japan continue to experience softer economic growth.
If the trade deficit improves further in April, it could be seen as weakening President Trump’s argument that the US is being taken advantage of by its trading partners. G6 leaders could point out at the upcoming G7 summit that the US trade position is already on the mend and that tariffs are unjustified. The US angered its allies on June 1 when Trump refused to extend the exemption from the steel and aluminium tariffs for Canada, Mexico and the European Union.
On the other hand, if the trade deficit widens in April, it would probably heighten the urgency for President Trump to take action. A confrontational Trump at the G7 summit in little mood for compromise would likely do nothing in bridging differences and would only further unite the other six leaders against the US President. The absence of progress on the trade front at the summit would raise the prospect of the EU slapping retaliatory tariffs on US products and give China more reason to take a tougher stance in its trade talks with the US.
A negative tone at the G7 summit would reignite fears of a full-blown trade war, which markets have been dismissive of in recent weeks. The dollar is at risk of a sharp reversal against the safe-haven yen if traders begin to price in more tit-for-tat tariffs by the world’s major trading powers. Increased trade barriers on a broad range of products and not limited to just steel and aluminium would be harmful to global trade and potentially damage the US economy in the long run.
The dollar could head back towards the 109 level versus the yen if risk appetite deteriorates after this week’s summit. A bigger sell-off would drag the pair towards the 50-day moving average (currently around 108.65). A breach of this support would bring the 107.90 region into view.
However, a surprise agreement by G7 leaders for more dialogue to resolve their trade differences and to put retaliatory measures on hold would provide a major boost to risk-on sentiment. The dollar could reclaim the 110-yen level if the Japanese currency is sold off on the back of easing trade war concerns. A steeper rally in dollar/yen would see potential hurdles at 110.45 and 110.90 before the next major resistance at 111.50.
