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The trade deficit has improved a lot since 2010 and the U.S. dollar strengthened
with it but I believe that is all about to change. Here’s why.
So says Katchum (katchum.blogspot.ca) in edited excerpts from his original article* entitled Correlation: Trade Balance Vs. Currency Strength.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Katchum goes on to say in further edited (and possibly paraphrased in some places) excerpts:
As you know, a trade deficit means that imports exceed exports. Americans buy more stuff from foreigners and in exchange they give money to these foreigners. This money needs to be in the currency of the foreigners. Let’s say an American buys a Chinese TV. He will have to pay yuan to the Chinese merchant. To do this, he will convert U.S. dollars to yuan. This will lower the value of the U.S. dollar.
The other way round is also true. China has a trade surplus and will sell its goods to America in exchange for U.S. dollars. These U.S. dollars will be converted to yuan, otherwise the Chinese merchant can’t do much with the U.S. dollars in his country. This will increase the value of the yuan.
Of course, there is a lag between trade and currency conversion. This lag is approximately 1 year. As a consequence, the trade balance is a leading indicator for the strength of a currency. The higher the U.S. trade deficit, the more probable that the U.S. dollar will go down in value.
The following chart gives the monthly U.S. trade deficit (red chart) Vs. the U.S. dollar index (blue chart). If the trade deficit widens (red line goes down), the U.S. dollar index will drop (blue line goes down).
Conclusion
Knowing that the extent of U.S. trade deficit is a leading indicator for currency weakness, you can predict the collapse of the U.S. dollar by just looking at the trade deficit trend and, as such, you can position yourself for this collapse in the U.S. dollar by buying precious metals and commodities.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://katchum.blogspot.ca/2013/09/correlation-trade-deficit-vs-currency.html
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