Deficits Hit Record Highs

It was difficult not to notice last week that the U.S. trade deficit swelled more than 11% to an all-time record of $66 billion in September. At this rate, the burgeoning trade gap looks poised to exceed last year’s record of nearly $618 billion.

Sophisticated futures traders really ought to be running through the various trading scenarios in their heads. With enormous (and evidently, growing) trade and budget deficits, the U.S. is heavily dependent on foreign capital to keep our economic engine purring along. If foreigners lose their appetite for additional Dollar-denominated assets, it seems likely that interest rates will have to rise in order to keep their attention. And should they ever begin to question the ability of the U.S. to repay its mounting debt, it wouldn’t be inconceivable that they also might demand a greater risk premium (much like bond investors demand higher yields on the securities of companies with highly leveraged balance sheets).

Keep an eye on these trade and budget deficits. If interest rates rise further, there’s a possibility GDP growth could slow, the stock market could be pressured, and the Dollar’s recent rally may fizzle. That means potential trading opportunities in the interest rate, stock index, and currency futures markets. Even for the most technical traders, there’s still a place for fundamental analysis.