Balance of Trade Forex

Balance of trade data is a very important piece of understanding the global puzzle of international trade, and thus, forex.  Much like an income statement, balance of trade data clearly defines whether a trade deficit or trade surplus is in play.  

Why Balance of Trade Matters

Balance of trade data shows the imports and exports of goods and how a country competes in a global marketplace.  Balance of trade numbers can run a trade deficit, showing that a country imported more than it exported, or they can reflect a trade surplus, exporting more than was imported in a specific time period. 

Imports and exports can include physical goods and intangible services.  Luxembourg, which is a popular banking destination, has one of the highest per capita service exports because its banking system is used internationally.  Likewise, Middle Eastern nations have stronger physical exports due to the international oil trade. 

Just as a negative balance of trade is a bad sign for a country's long run economic health, high export figures can be equally poor for domestic trade.  China, which has for a long time been a net exporter, has fought several bouts of domestic inflation as money flows into the country from all over the world.  When the supply of money rises internally at pace faster than the relative increase in wages, internal consumption and demand can be temporarily stymied, causing recessions

However, all things considered, a country would much prefer to attract too much foreign export purchases than too few, as a negative balance of trade cannot be sustained forever.  In addition, negative trade increases the possibility of high national debts or inflation from the central bank to maintain domestic currency levels.

Making Use of the Data

Balance of trade data is released once per month and may be revised as time passes and the numbers become clearer.  Since tallying all the exports flowing out of a country and all the imports flowing in requires a substantial amount of record keeping and manpower, these reports on trade surplus or trade deficit may be revised for years following their first release.

From a forex trading point of view, balance of trade statistics are best used in conjunction with balance of payments.  While a net importer cannot show a positive balance of trade, it can, and in many times does, show a positive balance of payments.  This is because net importers have to borrow from other countries to sustain their current consumption, and they routinely borrow more funds than are needed in a single time period or calendar year.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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