How Trade Balance Affects Forex Markets

0
213

Demand in the global markets for a currency is a key driver of price valuations in forex. One of the main indicators of demand for a currency is the amount of exports versus imports into and out of a country. Therefore, trade balance reports from a country are important for forex traders attempting to forecast future price fluctuations for that country’s currency.

When Are Trade Balance Reports Released?

Most major countries, such as the United States, release their trade balance reports on a monthly basis. However, there are some countries with smaller economies that only release their trade balance reports on a quarterly or yearly basis. For example, Panama releases trade balance data every quarter while North Korea provides trade balance reports once per year.

How Is a Country’s Trade Balance Calculated?

The trade report reflects the difference between the value of exports of good and services leaving a country and the imports entering into a country. When the value of exports is more than the value of imports, that country’s trade balance will be positive. On the other hand, when imports are more than exports the trade balance will be negative.

How Trade Balance Affects Demand for a Currency

Foreign customers looking to purchase goods and services within a country are required to convert their money into the country’s home currency. This causes an increase in exports, resulting in higher demand for the currency, putting upward pressure on the currency’s valuations. Imports of goods and services into a country have the opposite effect. Therefore, a higher trade balance report is generally considered bullish for a currency while a lower trade balance is considered bearish.

Forex traders looking to capitalize on the release of the trade balance reports should not analyze this data in a vacuum, but instead should make sure to consider other aspects that could affect the trajectory of currency price movements. This can help to avoid unnecessary losses due to interpreting trade balance data out of context. Additionally, proper risk management strategies will also assist in preventing major losses to a trader’s account.

 
Writer Bio

LeBach PhamLe Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.

Sources:

  • http://fxtrade.oanda.com/learn/intro-to-currency-trading/fundamental-analysis/monetary-policy
  • http://www.investopedia.com/articles/forex/11/trading-us-trade-balance-report.asp]
  • http://www.babypips.com/forexpedia/trade-balance

NO COMMENTS

LEAVE A REPLY