Tag: Exports

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Forex Fundamental Analysis

What Does ‘Exports by Category’ Data Indicate About A Nation’s Economy?

Introduction Export is an essential component of a country’s balance of trade. International trade is the heart of the FOREX market that constitutes the fundamental moves in currency pairs. The imbalance in various country’s balance of trade is offset by equal and opposite volatility in currencies. Hence, understanding the macroeconomic dynamics of trade relations, compositions, […]

Introduction Export is an essential component of a country’s balance of trade. International trade is the heart of the FOREX market that constitutes the fundamental moves in currency pairs. The imbalance in various country’s balance of trade is offset by equal and opposite volatility in currencies. Hence, understanding the macroeconomic dynamics of trade relations, compositions, […]

Introduction

Export is an essential component of a country’s balance of trade. International trade is the heart of the FOREX market that constitutes the fundamental moves in currency pairs. The imbalance in various country’s balance of trade is offset by equal and opposite volatility in currencies. Hence, understanding the macroeconomic dynamics of trade relations, compositions, and how they are tied to currency values can deepen our fundamental analysis.

What are Exports by Category?

Export: It is the sale of domestically produced goods or services to the foreign market. If goods manufactured within the nation are sold to customers outside the country’s borders, it is referred to as an export. On the other hand, imports are the purchase of foreign goods or services by a country. Generally, a country exports a particular commodity because it either efficiently manufactures or is more capable than the importing country.

A country like Canada, which has abundant oil reserves, can export to countries like China, which has a massive demand for its industrial economy. Similarly, China may export electronics to other countries like the United States, as they have a competitive edge in that domain. Exports bring domestic currency into the country in exchange for produced goods and services. Imports bring in goods and services into the country and send out the domestic currency. Hence, countries must maintain a “balance” in its international trade to keep currencies in an equilibrium.

How can the Exports by Category numbers be used for analysis?

If a country’s exports exceed its imports, it is said to have a trade surplus or a positive balance of trade. On the contrary, if a country’s imports exceed its exports, it is said to have a trade deficit or negative balance of trade. Imports signify consumption, and exports signify production. In a perfect world, the trade balance would be zero, meaning a country would produce equal to what it consumes. In reality, the balances are skewed and change from time to time.

When a country exports, it accumulates wealth. Many developing economies like China have increasingly depended on exports for their economic growth. By investing heavily in optimizing its industries and resources, many developing economies could export goods at a lower price to developed economies. A trade surplus (exports exceeding imports) is generally seen as beneficial to the economy. Prolonged periods of trade surplus, drains the international market of that country’s currency, thereby increasing its valuation against other currencies.

When a currency valuation appreciates imports become cheaper as more goods can be procured per unit of currency. In general, a trade surplus is seen as beneficial, but it may not always be the case. For instance, a country might increase its imports of construction materials to develop its cities and state infrastructure. During this time, it may have a trade deficit, but later once the work is done, its exports may improve beyond its previous highs and pay off for the years it maintained a deficit.

Countries export and import in millions and billions of dollars. When a country exports goods, it does so in large quantities, and the corresponding transaction would also be significant. Such transactions amongst countries with different currencies need to be exchanged. Such exchanges in the international FOREX market occurring for fundamental reasons sets off the equilibrium.

By the natural market forces through demand and supply, currencies will come to a new equilibrium. The movement in currency values through such fundamental moves is accompanied by speculative transactions from investors and traders worldwide. Approximately 20% of all FOREX transactions occur for pure fundamental reasons while remaining occurs for speculative purposes.

Understanding the portfolio of exports a country has can help us get a fundamental idea about the underlying goods and service exports that influence currency moves. For instance, Australia depends heavily on Iron Ore exports (approximately 20%). The Iron exported is sold mainly to China and Japan. If business activity in China reduced because of some reason, a decrease in demand would reduce exports for Australia, followed by a corresponding drop in AUD currency value.

The below image depicts how AUD value against USD follows Iron Ore prices. Hence, countries that depend on fewer exports experience higher volatility than countries with a more diverse portfolio of export and imports.

Impact on Currency

The ‘Exports by Category’ is not an economic indicator but is an essential statistic to understand the country’s trade relations. The composition of exports of a country does not vary significantly every month as exports and imports are based on trade agreements and business contracts that generally last years at a stretch. Exports by Category can be used to identify which goods and services are potential influencers for currency volatility. Hence, overall it is an essential requisite for fundamental analysis but not an economic indicator.

Economic Reports

For the United States, the Census Bureau tracks all the import and export statistics on its official website. The international trades categorized based on trade partners and Categories of goods and services are also available.

Sources of Exports by Category

The Census Bureau’s International Trade Data, the Export & Import by Trade Partner, Foreign Trade has all the necessary details. Consolidated reports of Exports by Category for most countries is available on Trading Economics.

Exports by Category News Release – Impact on the Currency Market

We know that Exports is an important fundamental driver of an economy, that can significantly impact a nation’s currency. Digging deep into Exports, we can widen the heading into Exports by Category and Exports by country. In other words, the result of the two is reflected in the Exports data.

Exports by Category, not being an economic indicator, barely has any impact on the currency of an economy. Moreover, the data is based on trade contracts, due to which the numbers do not change often. Nonetheless, let us combine the Export by Category and Exports data to study the volatility change in the currency market.

Exports Report – USD

Exports by Category – United States

According to the reports, the US’s exports dropped by USD 6.6 billion from the previous month, reading USD 144.5 billion in May 2020. Looking at the Exports by Category data, all the top five categories saw a decline in Exports.

EURUSD – Before the Announcement

Below is the price chart of EURUSD on the 4H timeframe. Before the release of the Exports by Category (Exports), we see that the market is consolidating, and there is no clear trend as such. However, the market is slightly leaving lower highs and lower lows, indicating EUR weakness and USD strength.

EURUSD – After the Announcement

On the day of the news release, it is seen that the price showed bullishness in the beginning. However, it got rejected by the sellers by the end of the day.

In the following days, we can see that the market broke out from the consolidation and began to trend north, implying USD weakness and EUR strength. There certainly would be several factors to it, but one of the accountable factors can be the disappointing numbers projected by the Exports.

USDJPY – Before the Announcement

Prior to the release, we can see clearly that the USDJPY market was crashing down. However, it saw bullishness in the last week of June.

USDJPY – After the Announcement

The USDJPY price saw feeble volatility on the day the news was released. In hindsight, the market dropped and continued the predominant downtrend. This indicates that the USDJPY has negatively affected post the Exports by Category numbers.

GBPUSD – Before the Announcement

Before the report on Exports by Category, the GBPUSD market was in an evident downtrend, as represented by the trendline.

GBPUSD – After the Announcement

A day before the numbers were reported, the price aggressively broke above the trendline, indicating a reversal.

When the news released, the price tried going higher but was pushed right back down by the sellers. However, subsequently, the market did change direction and began to trend north.

Thus, it can be concluded that the market did not have an immediate effect on the prices but did have an expected outcome in the short-term. Cheers!

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Forex Fundamental Analysis

‘Imports by Country’ – How Crucial Is It To Know About This Fundamental Forex Driver?

Introduction Currency values are critical for international trade and vice-versa. The exchange rates are directly influenced by changes in import and export composition, quantity, and prices. The volatility of a currency is directly associated with the country’s import and export relations with other countries. Understanding how international trade affects currencies in the forex market is […]

Introduction Currency values are critical for international trade and vice-versa. The exchange rates are directly influenced by changes in import and export composition, quantity, and prices. The volatility of a currency is directly associated with the country’s import and export relations with other countries. Understanding how international trade affects currencies in the forex market is […]

Introduction

Currency values are critical for international trade and vice-versa. The exchange rates are directly influenced by changes in import and export composition, quantity, and prices. The volatility of a currency is directly associated with the country’s import and export relations with other countries. Understanding how international trade affects currencies in the forex market is paramount for fundamental analysis.

What are Imports by Country?

A country’s trade balance (net exports and imports) is critical for currency valuation. The Balance of Trade refers to the required balance to exist between the total monetary value of a nation’s exports and imports. It is key to currency valuation. When a country exports, domestic currency comes into the country in exchange for the sale of products. When a country imports, the currency goes out in exchange for purchasing goods outside the country. Hence, a balance of exports and imports to maintain a healthy economy.

It is often necessary to understand a nation’s export and import composition to grasp its ties with other countries. Countries’ dependency on goods and services from other nations induces leverage and power for the exporting countries. For example, the United States imports 20% of all its goods from China. If China were to cut-off all its exports to the United States, that would dramatically impact the United States economy and its currency. Hence, the categorization of imports based on country and goods gives us an idea of the underlying relationships between currencies.

United States Imports by Country 

Source: Trading Economics
How can the Imports by Country numbers be used for analysis?

Today’s global world is one that is tightly interconnected and has complex links amongst countries. Understanding trade composition helps us in identifying where to look for volatility. For instance, the United States only imports about 2% of its products from India. If, for some reason, the import prices changed from India in either direction or completely stopped, it would not impact the trade balance significantly.

Hence, categorization based on countries helps us understand the dependencies a particular country has. Heavy dependence on a limited set of countries, especially for primary resources like energy and food, is not suitable for the economy. During times of a natural disaster in the exporting country will affect the dependent countries also.

A country that solely depends on its trade relations with fewer countries is likely to see more volatility in currency valuation. The more diverse the portfolio of a country in terms of its international trade partners, the more robust the currency is. Hence, currencies like the AUD, CAD are more volatile currencies because their exports are heavily dependent on fewer markets, unlike the EUR and USD.

Imports and Exports by country and category of products are equally essential to understand a nation’s currency volatility. For instance, Australia’s heavy dependency on coal and iron ore exports to china and japan induces volatility in AUD currency in correlation with coal and iron ore prices.

The Imports by country is not an economic indicator but is a prerequisite for understanding macroeconomic analysis of currency pairs. Currency valuations are primarily affected by trade relations a country has. It is not frequent for a country to change its import composition by country often, but it has a significant impact on the currency when it does.

Imports form only one half of the equation. Overall to understand the macroeconomic dynamics, both exports and imports have to be taken into account. Also, currency value change has a direct effect on imports and exports. When the Domestic currency appreciates imports are cheaper and profit margin increases for importing companies but hurts exporters as they receive fewer dollars than before. When the domestic currency depreciates, imports get hurt while exporters benefit. Some countries competitively peg their currency lower during export and higher during import. This phenomenon is sometimes referred to as “currency wars.”

Changes in import and export composition as a result of trade agreements or tariffs imposed has a more direct impact on companies that constitute the import and export goods and services. Hence, stock prices of companies are more sensitive to import and export data.

Impact on Currency

Imports categorized based on countries is for segregation and analysis purposes only. It is not an economic indicator in itself. Still, it is essential to understand the existing trade partners of a country to know which currencies are being exchanged for what goods. Imports and Exports both make up the balance of trade, which helps to analyze currency valuation.

Hence, Imports categorized by country are although useful, changes in the composition are necessary for a macroeconomic picture but does not induce volatility in itself. Any change in composition would have already been announced in news reports that would be priced into the market. It is useful at the starting point for establishing currency analysis, but it is neither an economic indicator nor induces any volatility in currencies.

Economic Reports

For the United States, The Census Bureau tracks and consolidates import and export composition on its official website. It releases monthly data ranking countries with which it had exports and imports. It details all the goods and services that are exported or imported from the partner countries.

Sources of Imports by Country

Census Bureau’s Trade highlights reports are available here. We can find a consolidated listing of “Imports by country” of most countries on Trading Economics.

Imports by Country News Release – Impact on Price Charts

Imports by Country is an important piece in analyzing the “Trade” and “Imports” fundamental indicators. It alone is not an economic indicator but is one of the components that make up a fundamental indicator. Precisely, the balance of trade is the economic driver that references the data obtained from Imports and Exports. Extending further, the data from Imports is acquired from factors like Imports by Country and Imports by Category.

Imports by Country alone does not pump up the volatility of the market. Also, the report is released during the release of the Imports data.

Imports Report – Untied States

United States Imports by Country

The USA is the second-largest importer in the world. The imports of the USA are China, the European Union, Euro Area, Canada, Mexico. For the May data, the overall imports dropped from $200.9 billion to $199.1 billion. Imports from China and Canada increased the previous month, but the rest saw a slight decline.

NZDUSD – Before the Announcement

In the below chart of NZDUSD, on the 4H time frame, we can see that the market is in an uptrend. It made a high to 0.65815. Since then, the price has been retracing.

NZDUSD – After the Announcement

On the day of the report announcement, the NZD showed strength, while USD showed weakness. However, the volatility and volume remained average. In the following days, the bullishness remained intact. In fact, after consolidating for a while at the resistance, the price made a new high. Thus, we can conclude that the Imports by Country indirectly did affect the USD price.

AUDUSD – Before the Announcement

From the price chart of AUDUSD, we can see that the price action is similar to that of NZDUSD. Before the announcement of the news, the market was in a strong uptrend.  After making a high to 0.69845, the prices have been pulling back down.

AUDUSD – After the Announcement

During the announcement of the news, the market volatility was unchanged. However, in the subsequent sessions, the market reacted negatively on USD, and the price touched the recent high and even made a higher high. The market perhaps did react as expected to the new, but in the later weeks.

USDCHF – Before the Announcement

Before the announcement of the news, the market was in a pullback phase of a downtrend.

USDCHF – After the Announcement

On the announcement day, the volatility of the market was feeble. The price pushed to the downside but with low volume that is typically seen during the announcement of major news events.

In the following trading days, the predominant downtrend continued where the price made a new low from 0.93828. This down move could be due to several factors; however, there could be a slight effect on the Imports by Country report. Cheers!

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Forex Fundamental Analysis

What Should You Know About ‘Export Prices’ & Its Relative Impact On The Forex Market

Introduction

Introduction

Introduction

Exports and Imports are vital components of a country’s Trade Balance that directly affects currency value. Careful balancing of export and import prices is necessary for maintaining currency value. Understanding how export prices affect the overall trades, domestic businesses, and ultimately currency value can help us build a more accurate fundamental analysis.

What are Export Prices?

Export prices are the selling price on the products and services to be sold in the international market. It is the price of goods and services that are domestically produced and sold to foreign countries. Hence, it is the prices fixed on goods and services which is intended for sale by the exporter in the overseas market.

In the United States, the Export prices are measured as part of the “U.S. Import and Export Price Index.” Export price and Import price both together form a sort of “net” price that helps us understand whether we are exporting more and gaining, or importing more and losing.

How can the Export Prices numbers be used for analysis?

In today’s modern world, many nations have opened themselves up for international trade. It is quite common for foreign brands to compete with local brands in many countries. Globalization has led to rapid growth for the global economy. Exports and Imports are two essential elements of a country’s trade balance. Imbalance in trade creates a deficit or surplus that directly affects the country’s currency.

Increased exports and reduced imports mean more goods and services go out of the country, and currency comes in. When currency comes in, the foreign demand for currency increases, and thereby currency value goes up. If exports bring more currency into the country than imports send out, the country experiences a trade surplus, which is good for the economy and currency.

Increased import over export indicates more dollars are spent and go out in importing products and services than dollars coming in for the goods sent out. When the international market is flooded with a currency due to increased imports, its currency value falls against other currencies. In such a situation, a country is said to have a trade deficit. Export prices can rise for the following reasons:

Increased production cost

As the manufacturing or cost of the raw materials increases, it eats away the company’s profit margin. To avoid this, companies may translate these increased production costs to the end consumer by pricing their goods higher.

As companies not only have to compete with fellow local businesses, they need to compete with companies from other countries. An increase in prices through production cost inflation may put the country at a disadvantage and lose sales in the international market. Hence, even though export prices increased, the sales volume will decrease negating the effect. It generally does not work in favor of the country and its currency.

Increased demand

As demand for a particular good or service increases, the company may raise its prices to compensate for the limited supply. Price increase as a result of increased demand is always beneficial for the company, country, and currency. Export and import prices are used for many purposes, and some of which are:

  • Based on changes in export and import prices, we can predict future prices and domestic inflation.
  • We can evaluate currency values and exchange rates based on overall exports and imports for a given pair of countries.
  • It can be used as a reference for setting up other trade agreements and price levels.
  • It can also be used for identifying global price trends for any specific product or service.
  • They can be used to deflate or devaluate trade statistics.

Export prices are specifically more critical for developing economies, as through exports, they primarily achieve their growth. Export-led growth has benefitted developing economies to create wealth and developed countries to get goods at much lower prices in the international market.

Change in currency value also affects export and import prices. Weak domestic currency brings in more currency during exports while making it harder to import as they become relatively more expensive. A strong currency hurts exporters while it favors imports as more goods can be purchased per unit of currency.

Hence, we observe countries undergo “trade wars.” Trade war means countries intentionally devalue their currencies during exports and peg it higher during imports in their favor. Such tactics are regularly used by China, and seeing these other countries also do the same. Competitively devaluating or valuating domestic currency higher to make trades favorable to their countries is referred to as a Trade war. Hence, any increase in export price should solely happen through an increase in demand, as that is the only way the economy benefits in the long run.

Impact on Currency

Export prices alone do not provide us with a complete picture of a country’s trade balance. The overall export minus import price is what determines the overall currency value. Hence, for currency markets, the export prices alone do not provide the necessary insight. Therefore, it is a low impact indicator. But on an absolute basis, an increase in export prices is good for the economy and the currency and vice-versa.

Economic Reports

In the United States, the Bureau of Labor Statistics (BLS) publishes monthly export prices as part of its “Import/Export Price Indexes” at 8:30 AM around the middle of the month. It is reported in percentage changes compared to the previous month and is also reported by categorizing based on end-use.

Sources of Export Prices

We can find the Export Price as part of the Import/Export Price Indexes and end-use versions. We can find consolidated statistics on export prices for most countries on Trading Economics.

Export Prices – Impact Due To News Release

Export prices is an important fundamental indicator in analyzing other economic drivers. When it is combined with the Import Prices, the trade balance is obtained, which plays a vital role in the foreign exchange market. The trade balance is also a fundamental indicator that heavily impacts the currency of a country. Thus, traders always keep an eye on the release of the trade balance report.

Coming to Export Prices, it alone does not induce much volatility relative to that of the trade balance. However, since the trade balance is dependent on the Export Prices and Import Prices, traders do keep a watch on these data releases to get insights on the overall output of the trade balance.

Export Prices Report

Before is the latest report on Export Prices, which came out to be 1.4%. The Export Prices were expected to rise by 0.8%, but the actual number beat the forecast.

USDCAD – Before the Announcement

Before the announcement of the Export Prices data for the month of June, we can see that the market was in a fresh downtrend making news lows every step of the way.

USDCAD – After the Announcement

The news was published during the open of the New York session. It is seen that, right on the announcement of the data, the USD prices collapsed against the Canadian dollar. With the release of the report and the open of the New New York market, the market volatility was boosted.

In this case, we see that the market followed the direction of the overall trend. Thus, traders can take advantage of the volatility due to news and market open and trade based on their analysis. However, they should ensure that the report is within the normal range and not an outlier. During abnormal values, a trader may better off stay away from the related currency, and its pairs.

NZDUSD – Before the Announcement

A day before the release of the Export Prices report, the market was in an uptrend, signifying NZD strength and USD weakness.

NZDUSD – After the Announcement

Once the news was out, the volatility of the market remained the same, despite the open of the US market. This clearly implies that NZDUSD was stayed non-impacted with the Export Prices report. However, in the subsequent day, the market reversed its direction from an uptrend to a downtrend.

GBPUSD – Before the Announcement

On the day of the announcement of the data, the market was in a strong bullish movement. And the time of release, the price was trading right at the supply area.

GBPUSD – After the Announcement

Once the board released the report, the price aggressively turned around and shot south. The reason for the down move can be accounted for the supply region, while the increased volatility could be due to the news and the open of the North American markets. Cheers!

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Forex Daily Topic Forex Fundamental Analysis

Everything About ‘Exports’ & The Impact Of Its News Release On The Forex Market

Introduction

Introduction

Introduction

Exports make one half of a country’s International Trade Balance. In today’s modern economy, with many countries pursuing their economic growth through the main focus on their exports, we must understand Export and its implications on the domestic as well as the global economy. The big words that are thrown around in the media like “Currency Wars,” “Trade Wars,” etc. all revolve around the exports among countries. A thorough understanding of the International Trade and Balance of Payments of countries can help us gauge economic growth on a macroeconomic level very well.

What is Exports?

The sale of locally produced goods to foreign countries is called Exports. Goods and Services produced in one country only when sold to other countries it is called an Export. Countries generally export goods and services that they have a competitive advantage over other countries. For example, Germans export Cars, America export Capital Goods, China export electronic goods, Jamaica exports Coffee, etc.

The advent of Globalization led to an increase in international trade opening doors for domestic industries to tap into the global market. The journey has not been smooth, during the Great Depression, and the following World War II slowed down international trade where many countries closed off their doors to foreign goods as part of protectionist strategies.

Before the 1970s, countries were following an import substitution strategy for growth where countries believed in self-sustenance by producing their goods and services without relying on foreign countries. After the 1970s, the countries began to realize the failure of import substitution and started opting for Export-led growth strategy, and that has been the case to date.

In general, a trade surplus, i.e., a country’s exports, exceeds its imports, is good for the economy. Although, it may not always be necessary as countries may import more than their current exports to build future and long term projects that will assist them in their economic prospects in the long run. In today’s world, China, the United States, Germany, Japan, and the Netherlands are the biggest exporters in the world in terms of revenue.

How can the Exports numbers be used for analysis?

Exports are crucial for today’s modern economies because of the many-fold that it brings with it to the exporting country. The following are the benefits and impacts of exports on the economy:

Broader Market – Companies always want to sell more and increase their profits. By exposing them to a broader range of audience gives them a much better chance of making profits than with a limited audience. By tapping into foreign markets, the domestic companies have to evolve to meet the local demands of other nations and learn how to mix what they sell and what is required by the world well. All this makes the companies grow more robust and overall increases their size and revenue a lot faster than what they would have achieved through operating domestically.

Wealth – Exports increase demand and, consequently, profits. It ultimately leads to employment, increases in wages, and ultimately raises the standard of living. Governments actively promote and encourage exports by reducing tariffs and use protectionist strategies like import barriers to protect their domestic business.

Foreign Reserves – As the trade happens between two countries with different currency regimes, where the payment can be in the domestic or foreign currency, this increases the Central Bank’s currency reserves. With sufficient currency reserves, the Government can manipulate exchange rates to control inflation and deflation by increasing or decreasing currency volume in the global market whenever needed.  During times of substantial exports, countries intentionally peg their currency value lower to make their products appear cheaper and increase the returns on their exports. China has been accused of this low pegging their currency in their favor. Subsequently, other countries have retaliated by lowering their currencies as well. It is what is being called “Currency Wars.”

Trade Surplus – It is always better to be owed money than to owe money as an individual. The same, in general, applies to countries that want to be net creditors to the world than net debitors. Increasing trade deficits can pile up the country’s debt, which can multiply over the years and can be very difficult to overcome. A healthy level of exports, in general, brings more money into the country and keeps the economy going at a steady and healthy growth rate.

Impact on Currency

Today’s global currency markets are free-floating and self-adjusting. Any sudden surge in exports will be followed by a rise in the currency value to compensate for the increased demand on the global market for its currency. A decline in exports will be followed by decreased demand for the currency, and accordingly, the currency depreciates.

Although the market forces are self-adjusting, frequent Government interventions to speed up the correction process to keep the output of the business constant is common.

Economic Reports

Exports form part of a country’s Trade Balance, which is reported under the Current Account Section of the International Balance of Payments Report of the country. The Balance of Payments reports is released quarterly and annually for most countries. The Trade Balance reports are published every month, which consists of Exports and Imports figures.

For the United States, the Bureau of Economic Analysis publishes the monthly Trade Balance reports on their website in the 1st week of every month for the previous month.

Sources of Exports

Impact of the ‘Exports’ news release on the price charts

In the previous section of the article, we understood the importance of Exports in an economy and saw how it contributes to the growth of the country. Exports are nothing but goods and services that are sent to the rest of the world, including merchandise, transportation, tourism, communication, and financial services. A nation that has positive net exports experiences a trade surplus, while a negative net exports mean the nation has a trade deficit. Net exports may also be called the balance of trade. Economists believe that having a consistent trade deficit harms a nation’s economy, creating pressure on the nation’s currency and forcing lowering of interest rates.

In today’s lesson, we shall analyze the impact of Exports data on different currencies pairs and observe the change in volatility due to the news release. A higher than expected number should be taken as positive for the currency, while a lower than expected number as negative. The below image shows the total Exports of Australia during the month of March and April. It is evident that there was an increase in Exports in the current month by 20%. Let us look at the reaction of the market to this data.

AUD/USD | Before the announcement:

We shall begin with the AUD/USD currency pair to witness the impact of Exports on the Australian dollar. The above image shows the state of the chart before the news announcement, where we see that the market is in a downtrend, and recently the price has displayed a reversal pattern indicating a possible reversal to the upside. Based on the Exports data, we will look to position ourselves in the currency.

AUD/USD | After the announcement:

After the news announcement, the market moves higher and volatility increases to the upside. The sudden rise in the price is a result of the extremely positive Exports data where there was a rise in the value by 20% compared to the previous month. This brought cheer in the market, making traders to ‘buy’ Australian dollars and thus, strengthening the currency. One can go ‘long’ in the market after the news release with a stop loss below the recent ‘low.’

AUD/NZD | Before the announcement:

AUD/NZD | After the announcement:

The above images are that of AUD/NZD currency pair, where we see that the market is in a downtrend that began just a few hours ago, and recently the price has shown sharp reversal from its recent ‘low.’ Technically this is an ideal reversal pattern that signals a reversal of the trend. One can take a risk-free ‘long’ position if the news announcement does not change the dynamics of the chart.

After the news announcement, the price sharply rises and closes, forming a strong bullish candle. As the Exports were exceedingly high, traders bought Australian dollars and increased the volatility to the upside. This could be a confirmation sign of the trend reversal, where we can expect the market to move much higher.

EUR/AUD | Before the announcement:

EUR/AUD | After the announcement:

The above images represent the EUR/AUD currency pair, where the first image shows the state of the chart before the news announcement. From the chart, it is clear that the overall trend of the market is up, but recently the price has shown a strong reversal pattern to the downside. Looking at the price action, we will prefer taking a ‘sell’ trade depending on the impact of the news release.

After the news announcement, the price falls lower, with an increase in volatility to the downside. The bearish ‘news candle’ is a consequence of the upbeat Exports data, which came out to be exceptionally well for the economy. Since the Australian dollar is on the right-hand side of the pair, traders sold the currency pair in order to strengthen the Australian dollar. This is a perfect ‘sell’ for all.

That’s about ‘Exports’ and its impact on the Forex market after its news release. If you have any questions, please let us know in the comments below. Good luck!

Categories
Forex Fundamental Analysis

What Is Balance Of Trade & What Impact Does It Have On The Forex market?

Introduction

Introduction

Introduction

The Balance Of Trade AKA. BOT is essentially the difference or variance in a nation’s export and import. When understood correctly, this indicator can help us in evaluating the relative robustness of any given economy compared to the other ones. 

Understanding Balance Of Trade

In the simplest of analogies, consider a scenario where a rice seller sells $1000 worth of rice to other grain sellers in the market over a month. Within that month, if he had purchased $800 worth of goods like vegetables, fruits, etc. from the other vendors, his Balance Of Trade would be $200.

Here, in this example, the market is the entire world, and the rice seller is equivalent to a nation. $1000 is the net worth of the exported goods and services that went out of the country, whereas the $800 is the net worth of the imported goods and services that came into the country. In this case, $200 is the trade surplus that the country is having.

Therefore, Balance Of Trade can be considered as a difference between what goes out (exports) and what comes in (imports) over a given time frame. And depending on whether exports or imports are greater, a nation is said to be running a Trade Surplus or Trade Deficit, respectively. Fundamentally, an Export is when a foreign resident or nation purchases an in-country produced good or service, and an Import is when an in-country citizen purchases goods or services from foreign.

How is the Balance Of Trade calculated?

In the previous article, we understood the formula of a country’s current account. That is, Current Account = (Exports – Imports) + Net Income + Net Current Transfers.

In the above formula, (Exports – Imports) is the Balance of Trade.

How Can This Economic Indicator Be Used For Analysis?

Investors can use Balance Of Trade numbers to ascertain whether the overall economic activity of a nation has grown or slowed down concerning the previous month’s/quarter’s/year’s numbers. For example, a country which has seen a trade surplus for let’s say over ten years, and due to some calamities, its exports got hit. The nation might enter into a trade deficit or a reduced trade surplus. Such a relative comparison can help investors to ascertain whether a country’s economy is booming or slowing down.

In an absolute sense, a Trade surplus or Trade deficit, as discussed, cannot tell in entirety. But it will definitely give us a macroeconomic picture of an economy’s health and what the nation has undergone in the present business cycle. Let’s assume a country is a major exporter of oil for which it receives a majority of its income. If the production of oil is doubled, automatically there will be an increase in the demand for that currency worldwide. This will result in an appreciation of that country’s currency.

Not just this, but the Balance Of Trade can also point towards many things like an increase in employment or an oncoming expansion or recession when viewed with correct perspective and analysis.

Impact of Balance Of Trade on Currency

By simply looking at the BOT numbers, we cannot conclude whether a nation is experiencing growth or slow down straight away. Because the Balance Of Trade only projects a partial picture and not the whole picture.

A developing country might want to import more goods and services from abroad, which increases the competition in their respective markets. Thereby they keep the prices and inflation low. During these periods, that country will have a Trade Deficit. To an outsider, it will only look like the country is consuming more than it is producing. So this scenario can be wrongly assumed as the country’s economy is slowing down. But in reality, what if the country is experiencing a trade deficit for the first six months and a trade surplus for the next six months?

Developed nations like the United States and the U.K. have experienced long periods of trade deficits against developing and emerging economies like China and Japan, who have maintained trade surpluses for long times. Hence, the time frame, business cycles, the relative situation with other countries all factor in to give a correct interpretation to the BOT.

But in general, most of the time, an increase in the Balance of Trade number is good for Currency. It is a proportional indicator, meaning. Lower or negative Balance of Trade numbers relative to previous periods signals currency depreciation and vice versa.

Balance of Trade & Balance of Payments

BOT is a major component of a Nation’s BOPs, i.e., Balance Of Payments. Balance Of Payments, ideally, should always equate to zero, giving us a complete account of all things traded in and out of an economy. A nation can have a surplus while having a trade deficit. This happens when other components of Balance Of Payments like Financial Account or Capital Account run into large surpluses.

But in general, countries prefer to have a trade surplus, and it is obvious. A country in net terms receiving a gain or profit for their goods and services would mean that the people of that country will experience higher wealth, and it would automatically result in a higher standard of living. And also, by continually exporting, they would develop a competitive edge in the global market. This would also increase employment within the nation, which, in general, is favorable for the nation. But as said, it is always not necessary for this condition to be true. It depends on what goals the country has in mind for future short term deficits also matters.

Hence Balance Of Trade is one of the important indicators for analysts to ascertain a country’s economic activity and current health of an economy.

Economic Reports

Since the Balance of Trade is about imports and exports, data for the same is publicly available on a monthly basis for all the countries. The reports are released in the United States by the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The units would be typically in millions of dollars for most reports and for most nations. The popularly used reports are typically seasonally adjusted to give a more accurate report.

Sources of Balance Of Trade

To get the latest information about this economic indicator for the United States, you can refer to this link. To know all the diverse components involved in Balance Of Payments and International Trade, you can refer to this page from The Bureau Of Economic Analysis.

Impact Of ‘BOT’ News Release On The Price Charts

Now that we know the meaning of trade balance and how it affects the economy, we shall extend our discussion and understand how it impacts any of the currencies after the news announcement is made.

As we can see in the below image, the Trade Balance indicator has the least effect on currency (yellow indicator implies the least impact on currency). Hence, this might not cause extreme volatility in the currency pair after the news release. It is still important to understand the effect and look at how we can position ourselves in the market in such scenarios.

For illustration, we have chosen the New Zealand Dollar in our example, and we will analyze the latest’ Trade Balance’ data of the same. The data shows that Trade Balance was increased by 44M as compared to the previous reading, which is said to be positive for the currency. But let us see how the market reacted to this data after the announcement was made.

NZD/JPY | Before The Announcement - (Feb 26th, 2019)

The below chart shows that the overall trend is down, which means the New Zealand dollar is very weak. As said in the above paragraph that changes in Trade Balance of a country do not have much impact on the currency, so better than expected data can only cause a reversal of the trend. However, if the data is retained at previous reading, we can expect a continuation of the downtrend, and volatility will be more on the downside. We will be looking to trade the above currency on the ‘short’ side if the Trade Balance data is bad for the country since even positive data cannot push the currency higher.

NZD/JPY | After The Announcement - (Feb 26th, 2019)

After the news announcement, we see that the price crashed below the moving average, reacting to the not-so-good numbers of Trade Balance for New Zealand. The market participants were expecting much better Trade Balance data, but after seeing that it was increased by mere 44M, they were disappointed and hence sold New Zealand dollars. We can take advantage of this change in volatility by taking risk-free ‘short’ positions in the pair soon after the market falls below the moving average. We can hold on to our trade as long as the price is below the moving average and exit once we see signs of reversal.

GBP/NZD | Before The Announcement - (Feb 26th, 2019)

Here we can see that the New Zealand dollar is on the right-hand side, and since the market is in a downtrend, the currency is strong. In this situation, a risk-free way to trade this pair is by going ‘long’ if the Trade balance numbers are not good for the pair and after trend reversal signals. Since the downtrend is not very strong, we can take ‘short’ positions only if it breaks the recent ‘lows’ and shows signs of trend continuation.

GBP/NZD | After The Announcement - (Feb 26th, 2019)

After the numbers are out, we see the positive reaction for the New Zealand dollar as the numbers were better than last time, but it could not take it lower. Since the data was weak, we can ‘long’ positions in the pair once the price makes a ‘higher low’ after crossing above the moving average.

EUR/NZD | Before The Announcement - (Feb 26th, 2019)

The above chart represents the currency pair of EUR/NZD, which shows similar characteristics as that of the NZD/JPY pair but in reverse as the New Zealand dollar is on the right-hand side. In this pair, the New Zealand dollar is extremely weak, and we also the price is above the moving average showing the strength of the uptrend. Therefore taking’ short’ positions in this pair is not advisable even if the Trade Balance data is good for the New Zealand economy, as it is a less impactful event, and the reversal might not last. A better option would be to go ‘long’ in this pair.

EUR/NZD | After The Announcement - (Feb 26th, 2019)

After the news announcement, we see a red candle, and the price bounces off the moving average, continuing its uptrend. Since the data was not very positive, the market continues its uptrend, and thereby the New Zealand dollar weakens further. This could be the perfect setup for a ‘buy’ since all parameters are in our favor. The volatility here expands on the upside, after the news release.

That’s about the Balance of Trade and its impact on the Forex currency pairs. We just wanted to show how the markets get impacted after the news release. It is always advisable to combine these fundamental factors with technical analysis as well to ace the Forex markets. Cheers.