China trade deficit reduces currency talk pressure

China reported its first quarterly trade deficit in seven years at -$1.02 billion. Imports have surged by over 30% to over $400 from the previous year. The trade surplus is expected to be only $150 billion for the year. This compares with a trade surplus almost double in 2008. The trade surplus have been declining for the last three years. A key reason for the deficit has been the surge in commodity prices which have increased Chinese import costs even with volume not growing significantly. Now inflation is being imported with these higher commodity prices.This may not have been expected, but it is a result of the loose monetary policy of the Fed.

Nevertheless, it will be harder to argue for a faster increase in the yuan with trade surpluses decreasing at such a fast rate. The balancing of trade is occurring through other mechanisms than the exchange rate. The exchange rate will still have a reason to increase to allow imports to become cheaper since many commodities like oil are denominated in dollars.

Take away the policy rhetoric. Market forces are driving the potential for exchange rate moves.