Supply and Demand

Nothing affects financial markets, in fact any financial markets more than supply and demand. In the case of foreign exchange the two economic indicators of this are Capital and Trade flows. 

Capital flow measures the money that is flowing in and out of an economy for investment purposes, e.g. buying stocks and bonds or merging with or acquiring another company. Trade flow measures that money that is flowing in and out of an economy for the purchase of tangible goods and services, e.g. cars, electronics and professional services.

In addition the countries trade balance is a measure of the difference between imports and exports of tangible goods and services. The level of the trade balance and changes in exports and imports are widely followed by foreign exchange markets.

The trade balance is a major indicator of foreign exchange trends. Seen in isolation, measures of imports and exports are important indicators of overall economic activity in the economy.

It is often of interest to examine the trend growth rates for exports and imports separately. Trends in export activities reflect the competitive position of the country in question, but also the strength of economic activity abroad. Trends in import activity reflect the strength of domestic economic activity.

Typically, a nation that runs a substantial trade balance deficit has a weak currency due to the continued commercial selling of the currency. This can, however, be offset by financial investment flows for extended periods of time.

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