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US Trade vs the World Since Donald Trump became the President of the United States in 2016, we have heard him say a lot about the "unbelievably bad" trade agreements the world’s largest economy has with some countries around the world. We have already seen Trump attempt to renegotiate the North American Free Trade Agreement (NAFTA), which has reached a deadlock, and there is a possibility of the US scrapping the decades-old agreement between Canada and Mexico. But how does the trade balance look between the US and other nations around the world?

Trade Surplus President Trump has said that "We don't have any good deals. In fact, I'm trying to find a country where we actually have a surplus of trade as opposed to... Everything's a deficit." However, there are many countries which the US has a positive trade balance with.

It’s largest trade surplus is with Hong Kong at $29.7 billion, followed by the Netherlands. The US exports reached nearly $37 billion with Hong Kong in 2017 (from January to November) with $6.9 billion worth of goods imported. However, some analysts are suggesting that Hong Kong’s trade with the US will suffer from the ongoing tensions between the two largest economies in the world.

Trade Deficit Trump has aimed some strong words towards the countries which the US has a negative trade balance with. Most of the criticism has been towards the trading relationship with China – the world’s second largest economy. He may have a point as the trade deficit stands at a whopping $344.4 billion (year-to-date).

Trump said – "With China we have close to a $500 billion trade deficit, so we have to do something. I spoke to the president, I spoke to many people — we're going to work on that very, very hard. And we're going to do things that are the proper things to do." The second largest trade deficit is with one of Americas two closest neighbours – Mexico.

Donald Trump has slated the NAFTA agreement in particular, which he has called a disaster for US manufacturing. However, since Trump was elected we have seen some big American companies move their production back to the US. Most recently Fiat Chrysler, the world’s eighth largest auto maker announced its plans to move production of its Ram heavy pickup trucks from Mexico to Michigan.

Moving production of the Ram, which is mainly sold in the US and Canada, means that Fiat Chrysler will not be paying the high import duties which are likely to apply if the NAFTA agreement is rolled back. Overall, we can see why Trump has been criticising the trading agreements with some countries around the world. But will he be able to change it during his presidency?

His current actions would suggest that the United States’ trade policies will be changing.

US Indices at Record Highs US Indices have hit record highs in 2017 and are continuing to rally since the Trump presidency began back in January. The recent rally in the US Indices is mainly due to big number of companies reporting stronger performance results than the experts were predicting and a weaker dollar. Now let’s look at how the main US Indices have been performing in 2017.

Dow Jones Industrial Average About the Dow The Dow Jones Industrial Average (The Dow, WS30 on the Go Markets MetaTrader FX trading platform ) is a price weighted measure of 30 US blue chip companies. This Index covers all industries apart from utilities and transportation. [caption id="attachment_57659" align="aligncenter" width="532"] Source: http://us.spindices.com[/caption] The Dow in 2017 On 25 th January 2017, Dow Jones reached the landmark 20,000 barrier for the first time ever as Trumps pro-growth policies boosted the financial markets. It took under a month for the Index to close at 20,500-mark for the first time ever.

Then on 1 st March, the Dow reached the 21,000-mark for the first time and the rally continued. Just over 5 months later, on 2 nd August, the Dow reached the 22,000-mark for the first time ever after Apple posted quarterly results that beat the expectations. WS30 [caption id="attachment_57655" align="aligncenter" width="600"] Source: Go Markets MT4[/caption] S&P 500 About S&P 500 The Standard & Poor’s 500 (S&P 500, US500 on the Go Markets MetaTrader 4 platform ) is an American stock market index, generally viewed as the best single gauge of large-cap US equities.

There is over $7.8 trillion USD benchmarked to the index, with index assets comprising around $2.2 trillion USD of this total. The Index includes 500 top companies and captures approximately 80% coverage of the available market capitalization. [caption id="attachment_57660" align="aligncenter" width="546"] Source: http://us.spindices.com[/caption] [caption id="attachment_57656" align="aligncenter" width="600"] Source: http://us.spindices.com[/caption] [caption id="attachment_57657" align="aligncenter" width="600"] Source: http://us.spindices.com[/caption] S&P 500 in 2017 The Index first reached the 2,300-mark on 26 th January before falling below the level at closing. It took two weeks before the S&P 500 finally closed above 2,300.

The S&P first crossed 2,400 on 1 st March before again falling below that level at closing. The Index finally closed at above 2,400 on 15 th May. As you can see in the chart below, the S&P 500 has been climbing consistently in 2017 and the Index broke the 2,450-mark on 19 th June and it is predicted that it will reach new highs by the end of the year.

US500 [caption id="attachment_57658" align="aligncenter" width="600"] Source: Go Markets MT4[/caption] By: Klavs Valters GO Markets

US Dollar Index Futures with GO Markets For stock traders, trading indices is a cost-effective way to gain exposure to many different companies in one single transaction. Similarly, the US Dollar Index acts as a benchmark to currency traders. The index measures the value of the US Dollar relative to a basket of foreign currencies.

In other words, the US Dollar index assesses the USD’s global strength in relation to other currencies. Given that USD is the most traded currency, the index is a good representation of the direction of the Dollar. Rather than analysing a single currency pair, the index enables market participants to monitor its movement and hedge their position against a rising or falling Dollar.

Components of US Dollar Index The index consists of 6 foreign currencies which comprises of 24 countries with 19 countries being the members of the European Union. Many countries operate under a floating exchange rate regime and therefore they are highly influenced by the central bank monetary policies such as interest rate decisions, current account balance or other economic and political factors affecting the currencies. Source: GO Markets MT4 Two weeks ago, the index plummeted after the disappointing retail sales data (Actual figures -0.1% and the forecasted figures was 0.2%) but recovered after a few hours following the 25bp interest rate hike.

While the hike was expected, the US Dollar recovered as traders are now anticipating one more hike in the next Fed meeting which will be held on 25-26 July. GO Markets offer a quarterly contract on the Dollar Index (USDOLLAR) and the next rollover will be in September. This market is available with GO Markets on a 1% margin requirement.

The minimum trade size is 0.1 and maximum is 100 contracts. The units of trading for 1 contract size is USD1000*Index Value. There are no overnight interests and swap charges for the USD Index with GO Markets.

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UK Trade vs The World With the UK leaving the European Union next year, its trading arrangements with the bloc will change. How they will change will be determined over the coming months when both parties start the second phase of the negotiations. This will shine a light on what the agreement will look like and how it will impact the world’s fifth largest economy post Brexit.

Since the Brexit referendum in June 2016, the UK has indicated that it wants to strengthen its ties with India, China, Australia and New Zealand. But how does UK trade look against the rest of the world? Positive Trade The UK has a trade surplus with 67 territories around the world, including its closest neighbour Ireland, as well as Switzerland, Australia and the United Arab Emirates.

The UK’s biggest trading partner by far is the United States to whom they exported nearly £100 billion worth of goods and services in 2016. The United States imported just over £66 billion worth of goods and services in 2016 making a trade surplus of just over £33 billion. Source: Office for National Statistics Negative Trade The UK has a trade deficit with the biggest economies of the European Union; including Germany, Spain, the Netherlands and Belgium.

UK’s biggest trade deficit is with Germany – Europe’s largest economy. In 2016, the UK imported £75 billion worth of goods and services from Germany, while exporting just over £49 billion - a trade deficit of around £25 billion. However, being a member of the European trading bloc allows the UK to trade with no restrictions with the 27 other members.

The EU accounted for 48% of goods and services exports from the UK in 2016. While goods and services imports from the EU were worth more than the total from the rest of the world. Source: Google Maps / Office for National Statistics Source: Office for National Statistics

UK Making Post-Brexit Plans 2018 is shaping up to be a defining year for the relationship between the United Kingdom and the European Union. After making sufficient progress in the first phase of negotiations, talks will now begin on the trade arrangements after the UK leaves the EU. Even though the UK cannot agree on any trade arrangements outside of the EU before it leaves the trading bloc, it is already looking for potential trading partnerships around the globe.

One of them is the Trans-Pacific Partnership (TPP). What is the TPP? The TPP (currently changed to Comprehensive and Progressive Agreement for Trans-Pacific Partnership) is a trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The agreement was originally signed in February 2016, but is currently renegotiated after the United States withdrew from the agreement. The UK joining would effectively help to revive it. The agreement cuts over 18,000 tariffs between the member countries and represents around 40% of the world’s economic output.

The aim of the deal is to develop economic ties between member countries, cut tariffs, and boost economic growth. UK Talks The UK has held informal talks to join the TPP in a bid to start trade agreements after it leaves the EU. The proposal, developed by UK Secretary of State for International Trade Liam Fox, would make the UK the first member of the TPP that does not border the Pacific Ocean. “With these kind of plurilateral relationships, there doesn’t have to be any geographical restriction”, Greg Hands, the UK’s Trade Minister, stated.

A spokeswoman from the Department for International Trade said: “We have set up 14 trade working groups across 21 countries to explore the best ways of progressing our trade and investment relationships across the world. It is early days, but as our trade policy minister has pointed out, we are not excluding future talks on plurilateral relationships.” It is worth pointing out that the combined spending from the 11 TPP nations makes up less than 8% of the UK’s export market, with Japan (the largest economy within the TPP) taking around 1.6% of UK exports, while Germany alone accounts for 11%. However, it is unlikely any deals will be agreed to before the TPP itself has been renegotiated and the UK formally leaves the EU.

We are four months into 2016 and the global economic prospects are still uncertain. The International Monetary Fund (IMF) chief has just issued another warning in recent days, stating that the outlook for global growth is weak and has encouraged policy makers across the world to work together to “bolster confidence, support growth, and guard more effectively against the risk of a derailed recovery”. According to the IMF, lower consumer-led expenditure and governments that are less likely to use fiscal facets to support the economy, coupled with high levels of public debt (which are now the highest since World War 2) are creating a prolonged low-growth environment that can have very serious socio-economic implications.

Most of the developed nations have already embarked on a negative interest rates policy to address the low economic growth. However, as evidenced by this warning, their efforts have not yet been successful and markets and economies are still facing many uncertainties. Euro Area interest rates at various maturities Potential Trading Opportunities Although sluggish growth and negative interest rates are not pleasing for the majority of fund managers and pensioners, certain drivers and trends can potentially create opportunities to the benefit of traders.

Below is an overview of some of these drivers and their follow-on impact on the Japanese Yen, ASX200, gold and the Aussie dollar. Please note that these are our analysis of the market environment. They are not trade recommendations and you should have your own risk management strategy in place when trading the markets. 1) Opportunities and challenges in the banking sector All traders, whether equity or FX, should always keep an eye on the banking sector because stress and pressure in this space can affect every tradeable security across the globe (remember GFC?).

The low growth environment has put banks under downward pressure from various sources. First, it has limited the amount of investment activities which has inherently meant lower revenues for banks which are the traditional providers of investment capital. Second, it has made many banks deal with negative interest rates.

Banks are not yet willing to pass the negative rates to their customers because they want to keep their market share and to discourage people from cashing in their deposits. Therefore, negative rates have caused bank profits to shrink as the difference between interests they receive and the interest they pay has narrowed. Third, the prolonged lower commodity prices resulting from slower demand from China and other emerging economies has pushed a number of mining and energy companies, which have had large debts, to the edge of bankruptcy.

This is obviously bearish for banks as they have been the capital (loans) providers to these companies. Although Australian banks don’t yet have to deal with prospects of negative rates, they have pretty much remained in synch with their overseas counterparts, thanks to the end of the mining boom and lower commodity prices and bankruptcies in the mining and energy sector. For example, ANZ Bank has just announced that they will lose an extra $100 million in mining related bad debts.

Furthermore, Aussie banks are quite vulnerable to the property market here in Australia. Over the years, Australian banks have loaned out billions of dollars to property investors and therefore would have a lot to lose should the property market bubble burst. Major four banks performance From a trading perspective, deterioration in the banking sector can cause a chain of systematic risks which in turn may switch on a number of “risk off” trades.

Using the historical relationship between banks and asset markets, I have calculated that if the current downward trend in global and domestic banks accelerates and markets start to price in an additional weakness in this sector, some trading opportunities may arise in AUDUSD, AUDJPY, ASX 200 and Gold (In AUD). The table below shows how much these assets may move should Australian banks drop by an extra 20% from here: As you can see, ASX 200 index and AUDJPY traders may actually find meaningful medium-term trends should the banking sector start to deteriorate again. AUDJPY has recently enjoyed great buying support from yield-hungry Japanese investors as Australian currency offers a relative attractive yield.

At the moment, the pair has found solid resistance around 86.00 and deterioration in the banking sector can be a catalyst for this resistance to uphold and push the currency pair back to the 78 -79 band. 2) Trading Interest Rates Movements The U.S interest rate set by the Federal Reserve plays a significant role in any short and medium term trading. In response to continued low growth prospects and in the aftermath of the January and February volatilities, the once hawkish Fed which was singling 4 rate rises for this year, has stepped back and is currently signalling a rather softer tone towards rate rises. Just to remind the readers that interest rates are a measure of economic activities.

When policy makers think the economic conditions are getting stronger, they would raise interest rates to control the inflation. When they see economic conditions worsening, they reduce interest rates to stimulate the economy. The graph below (also known as the Dot Plot in the investment community) shows how the Fed governors were thinking about the 2016 economy (in terms of interest rates) both in Dec 2015 and March 2016.

The numbers on the left axis are the projected interest rates and the size of each circle shows the number of governors forecasting a particular rate. As you can see, in Dec 2015, the majority of Fed officials were thinking the rates would go around 1.35% by the end of 2016. However, since then, things have changed and the majority of Fed governors are now thinking we are more likely to be around 0.85% by the end of 2016.

Should the above dots keeps falling to the stage where U.S signals a possible rate cut and more importantly, a move towards negative interest rates, it will have some drastic impact on many tradeable securities. If markets start to price in any chance of U.S rates going negative, the Aussie dollar will lose significant amounts to USD, JPY and gold. The details are in the table below: Though I’m not predicting that the U.S rates will go negative, we are now living in an unchartered territory where everything seems to be possible.

If you talked about the likelihood of negative rates two years ago, most analysts would have laughed you out the door. But here we are today with most of the developed nations interest rates in the negative territory. Therefore, I would closely monitor anything related to the US interest rates.

US-10 year yield since December 2015 3) Trading Opportunities in USD/JPY pair While analysts are scattered around the future direction of the US dollar itself due to Fed’s change of tone, the case of the USDJPY is relatively straightforward. It’s the world’s most traded safe haven currency and trends downwards each time there is another negative surprise or volatility in the markets. In theory, USDJPY should have gone up when the Bank of Japan (BOJ) introduced negative interest rates earlier this year.

However, due to lack of investment opportunities brought by the low growth world and the fact that this pair acts as a barometer for global risk environment, it dropped by some 9.7% since the start of the year and brought short-term traders an abundance of trading opportunities (please refer to our previous article about this point). At the moment, there is nothing that suggests the current economic conditions are going to disappear. It is possible that the existing downward trend USDJPY can in fact continue for as long as the Fed is not taking a serious stance on U.S interest rates.

The biggest risk to the above scenario is a possible BOJ market intervention. The stronger Yen (lower USDJPY) is negative for Japanese economy as it makes their products more expensive abroad. Japan’s economy is highly export driven and higher Yen does not help.

Therefore, at some stage BOJ may decide that enough is enough and start selling Yen in a large scale to push their currency lower. But if history is of any guidance, BOJ’s probable intervention may only create additional shorting opportunity as these interventions have a poor record of effectiveness in changing the currency pair’s downward trends. The opinions and information conveyed in the GO Markets newsletter are the views of the author and are not designed to constitute advice.

Trading Forex and CFD’s is high risk. Ramin Rouzabadi (CFA, CMT) | Trading Analyst Ramin is a broadly skilled investment analyst with over 13 years of domestic and international market experience in equities and derivatives. With his financial analysis (CFA) and market technician (CMT) background, Ramin is adept at identifying market opportunities and is experienced in developing statistically sound investment strategies.

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