www.informedtrades.com/24555-current-account-measuring-trade-flows-move-currencies.html

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

1. An Overview of the Forex Market
2. The Difference Between Over the Counter (OTC) and Exchange-Based Markets
3. Who Really Controls the Forex Market?
4. The Role of the Retail Forex Broker
5. How Central Banks Move the Forex Market
6. How Banks, Hedge Funds, and Corporations Move Currencies
7. A Breakdown of the Forex Trading Day
8. Forex Trading - Characteristics of the Main Currencies
9. Setting Up Your Forex Trading Software
10. Forex Trading - How to Read a Currency Quote
11. Forex Trading - Understanding Currency Rate Movements
12. Forex Trading - Understanding the Bid/Ask Spread
13. How to Place Your First Forex Trade
14. How to Determine Your Position Size in the Forex Market
15. Forex Trading - Pips and Fractional Pip Pricing
16. How to Calculate Forex Trading Profits and Losses
17. An Introduction to Leverage in Trading
18. How Trading on Margin Works
19. How to Calculate Leverage in the Forex Market
20. How to Calculate Leverage in the Forex Market Part 2
21. How to Place a Market Order in the Forex Market
22. How to Place a Stop Loss and Take Profit Order in Forex
23. How to Place A Pending Entry Order in the Forex Market
24. How Rollover Works in Forex Trading
25. How Rollover Works in Forex Trading Part 2
26. Free Forex Charts Userguide
27. What Moves the Forex Market? - Trade Flows
28. How Capital Flows Move the Forex Market
29. The Current Account: How Forex Traders Can Use it to Identify Opportunities
30. Interpreting the Capital Account and Measuring Capital Flows
31. Fundamentals that Move Currencies - Balance of Payments
32. How Interest Rates Move the Forex Market Part 1
33. How Interest Rates Move the Forex Market Part 2
34. How To Trade the Carry Trade Strategy Part 1
35. How To Trade the Carry Trade Strategy Part 2
36. How To Trade the Carry Trade Strategy Part 3
37. Fundamental Analysis Vs. Technical Analysis in Forex
38. Forex Trading Fundamentals Quiz - Test Your Knowledge
39. Why the US Dollar is Still King
40. Determining the Fate of the US Dollar
41. Determining the Fate of the US Dollar Part II
42. Determining the Fate of the US Dollar, Part III
43. Economic Releases that Move the US Dollar
44. A Trader's Introduction to the Euro
45. A Trader's Introduction to the Euro, Part II
46. A Trader's Introduction to the Euro, Part III
47. A Trader's Introduction to the Yen
48. A Trader's Introduction to the Yen, Part II
49. A Trader's Introduction to the Japanese Yen, Part III
50. A Trader's Introduction to the British Pound
51. A Trader's Introduction to the Swiss Franc
52. A Trader's Introduction to the Canadian Dollar
53. A Trader's Introduction to the Australian Dollar
54. A Trader's Introduction to the New Zealand Dollar
55. Why Choosing a Forex Broker is so Confusing
56. Choosing a Forex Broker: Regulation and Financial Stability
57. Choosing a Forex Broker Part III: Transaction Costs
58. Choosing a Forex Broker, Part IV: Technology & Add-ons
59. Choosing a Forex Broker: Evaluating Customer Service
60. An Introduction to Forex Capital Markets (FXCM)
61. An Introduction to DailyFX Plus

This 61-video series is an introduction and in-depth look at the forex market, including how to place trades, the fundamentals of the forex market, profiles of the main currency pairs, and factors to consider when choosing a forex broker.



This is a continuation of The Basics of Trading course by Informed Trades.