Lesson 3: The Current Account and Measuring Trade Flows
Lesson 3: The Current Account and Measuring Trade Flows
In our last lesson we looked at the second category of what moves the forex market with a look at capital flows. In today’s lesson we are going to continue our free forex trading course with a look at how trader flows are measured, through something which is known as the current account.
While the concept that we are going to be covering here is fairly involved, I am covering this not because I feel we need to know all the details, but because having a general understanding of how the flows of money in and out of a country are measured, is important to help understand how the value of currency is affected by those flows. Now that we have an understanding of both trade and capital flows we are going to learn how each is measured starting with the current account.
The basic formula for calculating the current account for a country, is exports - imports of goods and services (also referred to as the balance of trade) Net Factor Income from Abroad (basically interest and dividends) net transfer payments (like aid given to foreign countries).
In general for the countries whose currencies we are focused on, the balance of trade portion of the formula is the main component we are concerned with and very little if anything will ever be heard about the other two components.
When thinking about a countries imports and exports (balance of trade), you will often hear a country described as having either a current account surplus or a current account deficit. A current account surplus basically means that a country is exporting more than they are importing which, as we learned in our lesson on trade flows, should strengthen the value of the currency all else being equal. A current account deficit basically means that a country is importing more than it is exporting which should weaken the value of its currency all else being equal.
If you remember from our lesson on trade flows I gave the example there of a US company needing to import 1 Million Dollars worth of steel from a Canadian steel producer. Just to give a simple example lets say for a second that this was the only transaction that both the United States and Canada did with foreign countries. If this were the case then the United states would have a current account deficit of 1 Million Dollars and Canada would have a current account surplus of 1 Million dollars.
Now obviously there are millions of transactions just like this one which go on between countries all over the world. The current account measures these transactions so we as traders can have an idea of whether the value of a countries currency should be increasing or decreasing based on the trade flows of that country, all else being equal.
As of this lesson China has the largest current account surplus at $363 Billion and the United States had the largest current account deficit at $747 Billion. It is because of this that many argue China's currency is too weak and the US Dollar is too strong, two imbalances which have started to right themselves over the last year.
Here is a graph of the current accounts of some of the major countries whose currencies we are focused on, so you can have an idea of whether those countries are more import or export oriented. As we will learn this is something which is going to be important when analyzing economic data relating to those currencies.
Japan: A Surplus of $201 Billion
Germany: A Surplus of $185 Billion
Switzerland: A Surplus of $67 Billion
Canada: A Surplus of $28 Billion
New Zealand: A deficit of $10 Billion
France: A deficit of $35 Billion
Australia: A Deficit of $50 Billion
Italy: A Deficit of $58 Billion
United Kingdom: A Deficit of $111 Billion
That's our lesson for today. In our next lesson we will look at how the capital flows side of the equation is measured so we hope to see you in that lesson.
Elevate Your Trading With The Amazing Trader!
The Amazing Trader includes:
Actionable trading levels delivered to YOUR charts in real-time.
Live trading strategy sessions.
Market Updates with Trading Tools.
Sign Up now for a free Trial now using the form below:
WEEKLY HIGH IMPACT NEWS: 5-Dec Mon
All Day- final Service PMIs 6-Dec Tue
04:30 AU- RBA Policy Decision
10:00 EZ- GDP
13:30 US- Productivity 7-Dec Wed
00:30 AU- GDP
15:00 CA- BOC Policy Decision
15:30 US- EIA Crude
23:50 JP- GDP 8-Dec Thu
02:00 CN- Trade
12:45 EZ- ECB Policy Decision
13:30 US- Weekly Jobless 9-Dec Fri
02:00 CN- CPI
09:30 GB- Trade
15:00 US- University of Michigan Survey
As expected, PM Renzi's Constitutional Referendum in Italy was defeated Sunday. The vote was a resounding "NO" and has seen the Prime Minister tender his resignation. An interim caretaker government will be installed while the political situation is sorted out. The EURUSD fell all the way down to just above 1.0500 before stabilizing and major short-covering setting in. No doubt there has been covert intervention underway by European National Banks, or other agencies.
The U.S. November employment data on Friday was a mixed bag. The 178K increase in Jobs was in line with street estimates, but was nothing to write home about. The surprising fall in the unemployment rate to 4.60% from 4.90% was due mainly to another decline in the Labor Participation Rate and the -0.1% fall in Average Hourly Earnings was a big disappointment.
I see no chance the data will change Fed intentions to raise rates on December 14. Monthly Job statistics and inflation are the two top items on which the FOMC monetary bases its policy decisions. Markets are running 100% odds on a 25bp Fed Funds target increase.
The U.S. Presidential vote recount is an ongoing uncertainty. U.S. Green Party candidate Jill Stein, with Clinton help, is supporting recounts in Wisconsin, Michigan and Pennsylvania. Odds in favor a reversal of the Trump victory are very slim.
looking for your first broker or do you need of a new one? There are
more critical things to consider than you might have thought.
We were trading long before there were online brokers. Global-View
has been directly involved with the industry since its infancy. We've
seen everything and are up-to-data with recent regulatory changes.
The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.
The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.
Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by Global-View.com.
The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.
Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.
Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.
Global-View.com also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at Global-View.com. This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES
CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN
EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE
PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE
INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC
REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL
SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR
SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.