Released on a monthly basis, the U.S. Trade Balance Report is a vital piece of economic data for the foreign exchange markets. Now, it's not on the level with reports like nonfarm payrolls or the consumer price index, but the survey does have relevance. Worldwide trade between countries affects the supply and demand for certain currencies - if a country's goods are in high demand, that same country's currency will also be in high demand. The key is to find and interpret key data points in the report that are relevant to the overall currency trend and apply them when initiating a position. (For other reports that have an effect on the U.S. Dollar, check out 5 Reports That Affect The U.S. Dollar.)

TUTORIAL: Beginner's Guide To MetaTrader 4

The U.S. Trade Balance Report
Simply, the U.S. Trade Report shows the difference in value between the exports of goods and services leaving the U.S. and the imports of goods and services heading into the U.S. If the trade balance is positive, then the value of U.S. exports is greater than the value of imports coming into the country. Conversely, the trade balance is negative when import values are greater.

Now, a positive trade balance report is vital to an economy that is experiencing expansion. Why?

Higher export growth - a driver of positive trade reports - fuels foundations for further growth and expansion. This is particularly true for manufacturing and industrial sectors. However, a negative balance report can weigh down an economy - potentially placing enormous pressure on a country's currency. That's why economists and currency traders always prefer positive trade balance reports to negative ones on a monthly basis.

In charge of this monthly responsibility is the Bureau of Economic Analysis, a division of the U.S. Department of Commerce. It is the BEA's job to calculate all components of the report, with the full release scheduled shortly after the end of the reported period. This can take time - and is the reason why the report isn't necessarily released on a set date or time like other economic reports (i.e. U.S. nonfarm payrolls).

Why the Report Affects FX
But, when it is time for the U.S. trade balance release, currency traders always look for the report to contribute to their overall positions.

First, foreign exchange investors are always concerned about the implications of the report and how it affects the U.S. dollar in the long term. A more positive trade balance report can lead to higher economic growth and production. This in turn will boost the likelihood that prices will rise in response to higher consumer spending. And, if prices rise, interest rates will rise - attracting more interest and investment into U.S.-based assets. All these things are good for the U.S. dollar.

But, a negative report would crop U.S. expansion prospects and decrease the likelihood that interest rates will be raised by the Federal Reserve. Moreover, a negative trade balance will become a drag on the U.S. economy - taking away from any economic gains in the short term. This is bearish for the greenback and will prompt money managers and traders to trim dollar holdings.

So, the report contributes a lot of perspective when considering positions on a long term horizon. This is why currency investors will always review the results of the U.S. trade balance report simultaneously when looking at important data points like consumer prices, gross domestic product and Federal Reserve rate announcements. (For more on how the imports and exports effect the economy, read Understanding The Current Account In The Balance Of Payments.)

And, then there's the short term.

Short term investors will consider the trade balance report as it relates to market sentiment. This is similar to the long term trader as the report acts as a simple component. But, it's different in that the investors will use the report as a reason to either buy or sell positions in the currency. Long term investors tend to trim their larger currency exposure, rather than completely buying or selling their positions.

How It Works
To clarify, let's take a look at some examples in the EUR/USD exchange rate.

With Europe's financial crisis surfacing and concerns over a Greek default mounting, the EUR/USD had come under selling pressure in the beginning of June 2011. Short term traders saw the pessimism surrounding the EUR/USD exchange rate and had already sold short the EUR while buying the U.S. dollar in the two sessions preceding the U.S. trade report release. If the U.S. trade balance was positive, this would be another great opportunity to sell the EUR/USD pair.

On June 9, the U.S. trade balance report was better than expected. The figure beat estimates, with the deficit shrinking to just under $44 billion. Now, although not positive, the contraction meant that the overall trade deficit was improving – a dollar positive.

Figure 1 – Traders referring to the U.S. trade balance report shorted the 1.4630 resistance level

Initiating short EURUSD positions at resistance of 1.4630 (Figure 1), and corresponding stops 50 pips above, traders were able to capture an intraday gain of about 150 pips (a 3:1 risk/reward ratio). The trade becomes even more profitable in the medium term as the spot exchange continues to decline to 1.4350 before testing major support.

Fast forward to July 2011, and a different opportunity emerges.

This time, on July 12, 2011, the market sentiment changed a bit. Although traders and investors were still concerned about a European financial crisis, the U.S. debt ceiling debate had begun to emerge. So, any U.S. dollar negative news would add to already rising concerns of a U.S. credit downgrade.

Short-term traders referring to technical analysis could already see that the EUR/USD currency decline seemed to be stalling. Confirmation of this signal would be a break of the descending trendline (1.4320-1.4044) in the 15-minute time frame (Figure 2). A penetration of this resistance level would indicate that momentum had shifted and that there was upside potential in the pair.

Figure 2 – Currency traders initiated buy positions at the retest of a broken trendline barrier

And, that's just what happened. Hours before the release, the EUR/USD pair broke through the trendline resistance - signaling a move higher. Short term traders watching this level placed long or buy positions on support of 1.3950 with corresponding stops of 50 pips placed below.

Intraday traders long on this position would have profited nicely as the EUR/USD topped out at 1.4052 that afternoon - giving traders a 100 pip gain (a 2:1 risk/reward ratio). Medium-term traders who held on would have seen the EUR/USD climb to as high as 1.4100.

The Bottom Line
Given these examples, it's easy to see that analyzing and applying the trade balance report is necessary to currency portfolio positioning these days. Without it, the FX investor will be missing out on underlying signs of a trend – both in the short and long term. But, those that are able to capitalize on this rather obscure report will benefit immensely from it. (For other reports and strategies you can use to profit from, see The Fundamentals Of Forex Fundamentals.)

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Is the White House too Optimistic on the Economy?

    Are the White House's economic growth projections for 2016 and 2017 realistic or too optimistic?
  3. Economics

    Can the Market Predict a Recession?

    Is a bear market an indication that a recession is on the horizon?
  4. Economics

    The Truth about Productivity

    Why has labor market productivity slowed sharply around the world in recent years? One of the greatest economic mysteries out there.
  5. Products and Investments

    The One Thing Your Portfolio Must Always Have

    Portfolio diversification is essential in any situation, but especially so as the market finally returns to fundamentals.
  6. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  7. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  8. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  9. Budgeting

    Is Living in Europe Cheaper than in America?

    Learn how living in Europe has financial advantages over living in the United States. Discover the benefits to take advantage of when it makes financial sense.
  10. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
RELATED FAQS
  1. At what level is the current account deficit considered excessive, in terms of percent?

    The current account is one of the main components of the balance of payments, which records the monetary transactions between ... Read Full Answer >>
  2. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  3. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  4. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  5. Is Israel a developed country?

    Israel is considered a developed country, although it has substantial poverty and large income gaps. The International Monetary ... Read Full Answer >>
  6. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center