Effects of Trade Balance on the Forex Market: The Beginners’ Guide

Effects of Trade Balance on the Forex Market: The Beginners’ Guide

Beginner Forex Trading Academy
June 20, 2020 by Lorenzo

Look at the electronic products, the toys and the clothes you bought last year. You will probably see that they were made in countries other than yours. It is the emergence of global trade. It is already possible for practically everyone to eat bananas from South America on European dishes in front of a TV made in China.

What happens when trade flow occurs?

The trade flow between economies affects the value of currencies. Whenever goods or services change hands, so it makes an amount of money. Latin American importers have to do this to purchase products from Japanese exporters.

Just like Japanese importers must change their currency to make items from Latin American exporters. Whenever importers do so, the supply and demand of the currencies of the two corresponding economies are affected. This influences their price.

Effects of Trade Balance on the Forex Market

It should be noted how the increasing demand for the currency of the exporter can affect the value of the money. The same happens with the expanding supply of the importer. You can also control the effects on the trade flow of the currencies the trade balance. The trade balance is probably the most important fundamental economic indicator of trade.

Effect of increasing demand from importers for the value of a currency

It increases its value. As demand increases, the supply also rises. This shows that the increasing demand for a currency increases its value:

For example, when Americans buy goods from Japan, they must buy them in yen (JPY). In other words, they have to make that currency, which increases their demand and, therefore, their value.

Effect of increasing supply from importers on the value of the currency

It decreases its value. As the supply increases, its price also decreases. This shows that the increasing supply of a currency decreases its value:

For example, when an American man makes products from Japan, they must purchase them in yen (JPY). To obtain them, they must sell United States dollars (USD). This increases the supply of the greenback and reduces its value.

The Trade Balance

It is a measure of the difference between imports and exports of tangible goods and services. Currency investors are following it carefully, as a change in import and export data.

The trade balance is a fundamental indicator of currency exchange trends. If one looks at it in isolation, the measure of imports and exports is essential. They are indicators of a nation’s general economic activity.

It is always interesting to examine the growth rate of both separately. Import trends reflect the competitive position of the country concerned. It also demonstrates the strength of the foreign economy and domestic economic activity.

Usually, a country with a deficit trade balance will have a weak currency due to the constant sale of its money. However, this can be compensated with financial investment flows for long periods.