The balance of payments

Traditionally FX dealers first focus on a country’s balance of payments (BoP), or trade balance as it is known in the US. The BoP is simply the net result of all importation to a particular country against all the exportation from that country. As shown in table 7.1, a country that exports more than it imports is said to have a trade surplus, while a country that exports less than it imports is said to have a trade deficit.

Table 7.1: outline of a country’s balance of payments (BoP)

All other things being equal, we would expect to see a country that exports more than it imports to have a firmer currency than a country that did more importing:

In highly simplistic terms, all other things being equal, a country that has a trade surplus is thought to be generating more foreign receipts than foreign debts. In order to convert these foreign receipts back into the local currency, there is a need to sell foreign currencies and buy the local currency. This buying of the local currency exceeds the selling that is undertaken by importers converting their funds into foreign currencies to pay for their purchases. The excess demand for the local currency would then, in turn, help to lift its value relative to other currencies. This can be represented as shown in table 7.2.