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Chapter 21, Part V. What Could Shape the Market? Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 22, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Flows of Goods

    Another kind of flows depends not on investors but on countries themselves. This is goods flows or trading. International commerce now is a very developed part of the overall global financial environment. All countries trade with each other – selling their own produced goods (export) and buying goods of other countries (import). If you check where different goods were made, you’ll find out that many of them were made in another country. All merchandise trading around the globe is accompanied by money exchange, and, as a result, money flow into and out of some country.

    So the difference in the value of imported goods and exported goods is named the “Trade Balance”. If country sells more goods (export) than it buys (import) then it has positive Trading Balance and vice versa:

    Positive Trade Balance = Export > Import

    Negative Trade Balance = Import > Export​

    Pipruit: So, and what impact of trade balance on currency?​

    Commander in Pips: Very simple. To buy something from another country, you need to purchase its own currency first. Second, if you buy more than sell, that currency will be in advance, since you need to buy more foreign currency to purchase all that you need. Hence foreign currency will increase in value, since demand for it is growing. If you will buy it for your domestic currency, then your currency will depreciate, since you will have to sell it. The most positive trade balance economies are China and Japan.

    Pipruit: And how does the US Dollar holds well in that case?​

    Commander in Pips: That’s because China and Japan sell their goods for US Dollars, but they do not convert them in CNY and JPY but invest them in US Bonds. Their holdings in US Bonds have reached an outstanding value around $1.5 Trillion – that is a hidden trading deficit of US. If they will quickly sell them and invest those dollars in own currencies – then the US dollar will fall miserably.
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