FOREX THEORY
Fundamental Factors That Affect
Currency Values (Part 3)
Trade Flows & Trade Balance
We’re living in a global
marketplace. Countries sell their own goods to countries that want them
(exporting), while at the same time buying goods they want from other countries
(importing). Have a look around your house. Most of the stuff (electronics,
clothing, doggie toys) lying around are probably made outside of the country
you live in.
Every time you buy something, you
have to give up some of your hard-earned cash.
Whoever you buy your widget from
has to do the same thing.
U.S. importers exchange money with
Chinese exporters when they buy goods. And Chinese imports exchange money with
European exporters when they buy goods.
All this buying and selling is
accompanied by the exchange of money, which in turn changes the flow of
currency into and out of a country.
Trade balance (or balance of trade
or net exports) measures the ratio of exports to imports for a given economy.
It demonstrates the demand of that country’s good and services, and ultimately
it’s currency as well. If exports are higher than imports, a trade surplus
exists and the trade balance is positive. If imports are higher than exports, a
trade deficit exists, and the trade balance is negative.
So:
Exports > Imports = Trade
Surplus = Positive (+) Trade Balance
Imports > Exports = Trade
Deficit = Negative (-) Trade Balance
Trade deficits have the prospect of
pushing a currency price down compared to other currencies. Net importers first
have to sell their currency in order to buy the currency of the foreign
merchant who’s selling the goods they want. When there’s a trade deficit, the
local currency is being sold to buy foreign goods. Because of that, the
currency of a country with a trade deficit is less in demand compared to the
currency of a country with a trade surplus.
Net exporters, countries that
export more than they import, see their currency being bought more by countries
interested in buying the exported goods. It is in more demand, helping their
currency to gain value. It’s all due to the demand of the currency. Currencies
in higher demand tend to be valued higher than those in less demand.
It’s similar to pop stars. Because
she’s more in demand, Taylor Swift gets paid more than Pink. Same thing with
Justin Bieber versus Vanilla Ice.
 Trade Flows & Trade Balance ...){kind=link}
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