Current Account, Import Prices Says US is Buying Goods on the Cheap
The Current Account Balance measures the flow of goods and services, income, and transfer of payments going into and out of the United States. In short, the Current Account Balance shows the difference between a country's investments and savings.
According to the U.S. Bureau of Economic Analysis, the U.S. current-account deficit increased to $124.1 billion in the fourth quarter of 2011, from $107.6 billion revised in the third quarter. This was lower than the expected deficit of $115 billion.
Most of the increase in the current-account deficit was due to a decrease in the surplus on income and an increase in the deficit on goods and services.
The Import Price Index measures the price changes of imported goods and services purchased from the United States.
According to the U.S. Bureau of Labor Statistics, the Import Price Index rose 0.4 percent in February; lower than the expected increase of 0.6 percent. The increase marked only the second time that import prices have recorded a monthly advance greater than 0.1 percent since the index rose 2.6 percent in April 2011.
Prices for overall imports increased 5.5 percent over the past 12 months, the smallest year-over-year rise since the index advanced 5.3 percent between December 2009 and December 2010.
The Current Account Balance has an importance factor in the markets, as it is used when economists forecast the long-term outlook in foreign exchange rates.
Theoretically, a lower than expected Import Price Index shows strength in the U.S. dollar, and a lower than expected reading in the Current Account Balance is negative for the US dollar.
The U.S dollar rose slightly after these economic numbers were released.
Investors are likely keying in on the fact that the Import Price Index came in less than expected. So, as the United States continues to export dollars, since the current account deficit increased, the lower than expected Import Price Index should imply that the United States is able to acquire more goods and services than previously expected.
Traders who believe that the Current Account Balance and Import Price Index are leading indicators for the US economy, you might want to consider the following trades:
- If you believe a strong dollar is positive for the US economy, you may want to go long companies who import products from overseas, like Wal-Mart (NYSE: WMT).
- With a strengthening dollar, you may want to short “flight-to-safety” assets like gold (NYSE: GLD).
Traders who do not believe that the Current Account Balance and Import Price Index are leading indicators for the US economy, you may consider alternative positions:
- If the rise in the dollar is overdone, then long different currencies like the Euro or Pound.
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