Trade balance announcements report on how much a country is exporting compared to how much it is importing. Countries that export more than they import have trade surpluses, while countries that import more than they export have trade deficits.
If you were to ask the leaders of any government whether they would rather have a trade surplus or a trade deficit, they would all choose a trade surplus. Unfortunately, not every country can export more than it imports. Some countries are net exporters, and other countries are net importers. Watching changes in the level of exports and imports, however, can give you a good idea as to how strong or weak the currency is going to be in the future.
Trade balance data are released in one key announcement that you need to watch:
Trade balance: Measurement of a country’s exports compared to its imports
Impact on Trade Flows
Widening Trade Surplus (Due to Increased Exports) = Increase in Trade Flows
Widening Trade Surplus (Due to Decreased Imports) = Decrease in Trade Flows
Shrinking Trade Surplus (Due to Decreased Exports) = Decrease in Trade Flows
Shrinking Trade Surplus (Due to Increased Imports) = Increase in Trade Flows
Widening Trade Deficit (Due to Increased Imports) = Increase in Trade Flows
Widening Trade Deficit (Due to Decreased Exports) = Decrease in Trade Flows
Shrinking Trade Deficit (Due to Increased Exports) = Increase in Trade Flows
Shrinking Trade Deficit (Due to Decreased Imports) = Decrease in Trade Flows
Impact on Investment Flows
Widening Trade Surplus —> Widening Imbalance in the Balance of Payments —> Decrease in Investment Flows
Shrinking Trade Surplus —> Widening Imbalance in the Balance of Payments —> Increase in Investment Flows (Sometimes Driven by a Hike in Interest Rates)
Widening Trade Deficit -> Widening Imbalance in the I3a lance of Payments -> Increase in Investment Flows (Sometimes Driven by a Hike in Interest Rates)
Shrinking Trade Deficit -> Widening Imbalance in the Balance of Payments -> Decrease in Investment Flows
Impact on Money Supply
Widening Trade Surplus –> Increase in the Money Supply
Shrinking Trade Surplus -> Decrease in the Money Supply
Widening Trade Deficit -> Decrease in the Money Supply
Shrinking Trade Deficit -> Increase in the Money Supply
Impact on Investor Fear
Widening Trade Surplus -> Confident Investors
Shrinking Trade Surplus -> Cautious Investors
Widening Trade Deficit -> Nervous Investors
Shrinking Trade Deficit –> Cautiously Optimistic Investors
Typical Impact on the Currency
Widening Trade Surplus -> Stronger Currency
Shrinking Trade Surplus -> Weaker Currency
Widening Trade Deficit ->Weaker Currency
Shrinking Trade Deficit -> Stronger Currency
