Forex Trading Basic

Fundamental Analysis on Balance of Trade and Current Account

Pivot Point Break Out Strategy in Forex Trading

Fundamental Analysis on Balance of Trade : Trade has developed to become one of the most major forces shaping world economies, with the business of buying and selling products in foreign markets representing a notable percent of any large economy’s GDP. For example, in the United States, over than 12 million jobs are tied to the international sector and about 25% of all U.S. business activity is connected in some fashion to international commerce. Usually traders are curious about the “net export” figure. Exports represent a country’s ability of competition in world markets, its ability to create jobs and improve corporate profits. To satisfy national and foreign demand firms have to produce more and greater production translates into faster GDP growth. The bedside of rising imports is that subtracts from GDP growth since these products are made by foreign companies.

The three key forces that shape a country’s trade balance: 1) relative difference in growth rates between home country and others; 2) propensity for country’s consumers to shop for foreign goods; and 3) changing value of the home currency against other currencies. If the home country is expanding faster than most other countries, imports will increase by larger amount than exports, thus ensuring a deficit. However, some countries like the U.S. shows an even larger propensity to import foreign products than buyer in other countries, which causes an additional problem for the US, which has been locked into yearend trade deficits every year since 1976. Changes in currency values can change the price of imports and exports and thus change demand. A stronger currency exchange the trade balances because it lowers the price of imports, making them more attractive for consumers, and at the same time it raises the costs of goods sold in international markets, cheering foreign buyers to look elsewhere for less expensive products.

Fundamental Analysis on Balance of Trade : Impact on Forex and Economy

The international trade in goods and services is a solid way for a country to earn foreign exchange. A strong currency is built on exports beyond imports. Net exports produce more revenue that stays in the country than goes out to acquire imports. Having more exports than imports translate into a strong trade balance and leads to a more stable currency and economy. The more goods and services that foreigners buy from country, the more of that country’s currency will need to give these products. In compare, a decline trade shortage can damage the currency. To buy foreign goods and services, the country’s citizens must put up for sale their currency to pay for the foreign products in their local currencies. Net imports represent more money leaving the country than coming in, which leads to poor exchange rates. It can also mean that local manufacturing of export goods as dropped and that the country has become a market for other countries to sell their products at the cost of our local industry, a situation which ultimately affects job loss and wages and GDP. Additionally, sometimes a great appetite for consumption must be fueled by credit. To finance their huge use, the US has had to use on average, more than 2 billion every day from foreigners, and this also weakens the dollar.

Fundamental Analysis on Balance of Trade : Economic Events

International Trade in Goods and Services (Or Trade Balance):

  • Impact: High
  • Countries: Most
  • Frequency: Monthly

This report measures the variation in value between imported and exported goods and services over the reported period. A positive number shows that more goods and services were exported than imported whereas a negative number indicates that more goods and services were imported than exported.

Current Account Balance:

  • Impact: Medium
  • Countries:US, Canada, Australia, Japan, Eurozone
  • Frequency: Quarterly

It is the widest accounting of a country’s trade and investment relationship with the rest of the world. One of the feature of this report deals with exchange of goods and services between home country and others. Besides selling and buying goods and services in foreign markets, there is also the import and export of asset capital. Every day foreigners buy and sell a country’s stocks, bonds, and other types of possessions, and the return of investments abroad is income that flow back into the country. The periodical report thus attempts to follow all these cross border movements of goods and services, income flow from investments and purchases and sales of assets. The finance account shows the movement of asset capital and loans into and out of the country, including what foreign currency and securities the government owns, what other governments own of country’s currency.

Treasury International Capital System: 

  • Impact: Medium
  • Countries: US
  • Frequency: Monthly

A report that tracks flow the investment funds entering and leaving the U.S.
since Americans love to shop beyond their funds and the Federal government pays out more than collects, there exists a large gap between expenses and income, which means that both households and the federal government have to borrow to fill the gap. Workers in Europe, Japan and China who are known to save from 5-40% of their income end up loaning their excess savings to the US, purchasing US stocks, bonds and other dollar assets. This foreign loaning becomes the capital the US needs to keep domestic interest rates low and economic growth to continue. Sadly, there will be a time when foreign creditors will find their CV’s heavily exposed to the US dollar and they will begin to scale back and diversify into other currencies. Demand for domestic securities and currency demands are directly connected because foreigners must buy the domestic currency to buy the nation’s securities.

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Please note that: gaining profit from fundamental analysis largely depends on your brokers MT4 platform functions. If your broker is vulnerable to high slippage problem during the time of news release, you are not going to get expected result from trading. So, while Choosing Forex broker, we would like to recommend you to start trading with a broker that has slippage guard. We recommend you to trade with HYCM Broker to get the best possible outcome of forex trading fundamental analysis. Read review of HYCM Broker to learn more on this

READ MORE:

Chapter 6

Forex Trading Fundamental Analysis

Lesson 1.Forex Trading Fundamental analysis
Lesson 2Forex Trading Fundamental analysis
Lesson 3Fundamental Analysis of Interest Rates
Lesson 4Fundamental Analysis of Inflation Rates
Lesson 5Fundamental Analysis on Balance of Trade
Lesson 6Fundamental Analysis on Government Factors
Lesson 7Fundamental Analysis: Employment / Unemployment
Lesson 8Fundamental Analysis on GDP
Lesson 9Fundamental Analysis on Geopolitical Risks

Go back to Main Page: Forex Trading for Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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