How the global trade balance affects the forex market

Table of Contents

The global trade balance is an important indicator that affects the forex market. A country with a trade deficit (more imports than exports) will see its currency weaken, while a country with a trade surplus (more exports than imports) will strengthen its currency. Countries with large trade deficits need to sell more of their domestic currency to buy foreign currencies to pay for imports. 

This increased demand for domestic currency drives down the value of the currency. Then again, if a country has enormous trade surpluses, it doesn’t need to sell as many domestic currencies, so the value of their currency goes up.

While the global trade balance is an essential factor affecting the forex market, it’s not the only one. Political and economic conditions in different countries also play a role in determining currency values. For example, if a country is experiencing political turmoil or an economic downturn, its currency is likely weaker than otherwise. So while the global trade balance is an important indicator, it’s not the only one traders need to watch.

Traders interested in trading currencies should know how the global trade balance affects the forex market. By keeping an eye on this indicator, they can make more informed decisions about buying or selling different currencies. This can help them to maximise their profits and minimise their losses. Forex traders should also keep track of other factors that can affect currency values, such as political and economic conditions.

How to measure and analyse the trade balance?

Economists use several methods and tools to analyse and monitor the global trade balance. One of the most important is the current account, which measures a country’s total foreign trade. The current account includes all payments and receipts between residents and non-residents over a period, usually one year.

The current account can be divided into three main categories: 

  1. The merchandise trade balance, 
  2. the services trade balance, and 
  3. the income and transfers balance. 

The merchandise trade balance is simply the difference between a country’s exports and imports of goods. The services trade balance is the difference between exports and imports of services. And the income and transfers balance is the difference between a country’s primary income (such as dividends, interest, and rents) and its secondary income (such as wages and salaries).

We all know that the trade balance is a vital indicator of a country’s economy and shows the difference between products and services bought from and sold to foreign countries.

It can be considered positive (a trade surplus) or negative (a trade deficit).

Trade balance and the GDP

But what exactly do we calculate when we want to take a look at our society’s import and export rates? And how does it work with the GDP?

One way of assessing this is by using online tools that offer explanations or even interactive charts showing you historical data. The goal of such graphs is usually to provide information about total exports (or imports) for a certain period concerning GDP over the same period. Economists and traders can easily observe how a country performs in its export and import rates.

You can use an array of online tools for this purpose. One such tool is the World Bank’s “World Development Indicators” (WDI). It offers explanations about what the data means and includes an interactive chart. The WDI website is available in several languages, including English, Spanish, French and Arabic.

Another helpful online tool for analysing the trade balance is the OECD iLibrary. This platform provides access to data from the OECD and other international organisations. It has a search engine that makes it easy to find specific information and an interactive chart that shows trade balances over time.

The IMF’s Direction of Trade Statistics is also a helpful resource for those interested in the trade balance. This platform provides historical data dating back to 1962, at least from 1995. It can give you information about your country’s imports and exports as well as the global trade balance.

And remember

Many more resources are available on the Internet in terms of online tools that offer interactive charts, and brokers such as Saxo offer excellent resources to help you on your trading journey.