FOREX ECONOMIC INDICATOR: CURRENT AND FINANCIAL ACCOUNT
Current account and financial account do not affect the currency of an economy directly, but still they have indirect effect on the currency value of an economy. Let's start with the definition, Current account is the difference between the export and import of an economy, and the financial account is the difference between the government income and expenditure.
Current account is measured deducting the import from export, and financial account is measured deducting the expenditure from income. Some other common words that come with the accounts are the current account deficit/surplus and financial account deficit/surplus.
If the import is greater than the export, the economy has a current account deficit, and if the import is smaller than the export, the economy has a current account surplus. Similarly, if the government expenditure is greater than the government income, the economy has a financial deficit, and if the government expenditure is smaller than the government income, the the economy has a financial surplus.
If an economy has negative currant account balance, current account deficit, that means that the economy investing heavily in domestic growth. This heavy investment may boost the economic performance. The better economic performance will increase the value of the currency.Some nations may also import large amount of consumer goods e.g. United States.
If an economy has positive current account balance, current account surplus, that means the economy has larger export than import. A positive current account significantly affect the currency value.
An economy with large financial account deficit generally intends to invest in the domestic economy. Hence the economy keeps the interest rate higher to attract the foreign investors. When an economy keep the interest rate high, the foreign investors invest in the domestic economy.
An economy with large financial account surplus has enough government income for the domestic expenditure. In this case, government is not under pressure to keep the interest rate higher.
Current account and financial account are linked between. When an economy keep the interest rate higher to cover the financial account deficit, the capital inflow into the domestic economy from foreign economies get increased, which affect the current account balance.
Large current account deficit always does not mean that the economy is in hard time. An economy may have a current account deficit because of the higher domestic demand for the domestic development.
A current account surplus may not be always positive for an economy, rather it can indicate a recession. During the recession of 1990s, US current account was turned into positive figure.
The economy with higher current account deficit need to perform better as domestic investment is higher, and an economy with current account surplus need to keep the pace of export to keep the currency stable.
In fundamental analysis of a currency, current account and financial account indirectly plays significant role . In forex trading, these economic indicators are considered to understand the economic situations and dimensions. Forex traders should not focus just only on the current account balance, but also its effects on the current economic situation.
An economy with large financial account deficit generally intends to invest in the domestic economy. Hence the economy keeps the interest rate higher to attract the foreign investors. When an economy keep the interest rate high, the foreign investors invest in the domestic economy.
An economy with large financial account surplus has enough government income for the domestic expenditure. In this case, government is not under pressure to keep the interest rate higher.
Current account and financial account are linked between. When an economy keep the interest rate higher to cover the financial account deficit, the capital inflow into the domestic economy from foreign economies get increased, which affect the current account balance.
Large current account deficit always does not mean that the economy is in hard time. An economy may have a current account deficit because of the higher domestic demand for the domestic development.
A current account surplus may not be always positive for an economy, rather it can indicate a recession. During the recession of 1990s, US current account was turned into positive figure.
The economy with higher current account deficit need to perform better as domestic investment is higher, and an economy with current account surplus need to keep the pace of export to keep the currency stable.
In fundamental analysis of a currency, current account and financial account indirectly plays significant role . In forex trading, these economic indicators are considered to understand the economic situations and dimensions. Forex traders should not focus just only on the current account balance, but also its effects on the current economic situation.
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