In previous publications (No. No. 27-37 FOREX MAGAZINE), we decided on the tools of fundamental analysis of foreign exchange market. With his assistance, we examined the relationship of major processes occurring in the economy with the dynamics of exchange rates. Now we will consider how the theory is consistent with real economic processes, and statistics.
Terminological inaccuracy appearing in the publication of balance of payments
As domestic sources of news can be found on the two main indicators - the trade balance and balance of payments. First published monthly, the second - a quarterly basis. By both measures in the U.S. huge negative values.
Terminology used is inaccurate, since "balance" must be balanced, ie Ideally the sum of its partitions must be equal to zero (debits equal to the loan, etc.).
What is the balance of payments (for example, U.S.)
The balance of payments (Balance of Payments, International Transactions) in fact to be known as the ratio between the sum of all payments made by the country to other countries for a certain period, and the sum of all revenue it received for the same period from other countries.
In abbreviated form, it looks like this.
Balance of Payments U.S. [Million. U.S. dollars, quarterly adjustments]
Source: U. S. Bureau of Economic Analysis
Those data are published, usually called "the balance of payments" in fact represent the current account (Current Account), which is one of the accounts of the balance of payments.
As it shows the operation:
• exports and imports of goods and services;
• The income of residents, coming from abroad (income from property and compensation for labor relations);
• ongoing payments to non-residents (income from property in the United States and compensation for labor relations);
• unilateral payments (grants, pensions, etc.).
Data on the trade balance - the difference between exports and imports of goods and services (in the analysis of previous publications, we use the term "net exports", which is more accurate). The values of the trade balance and current account differed slightly, and this difference is determined mainly by the amount of unilateral current payments.
Negative values of the current account should in any way funded.
Let us mentioned in one of the first publications on the FA equality
NX = NFI,
net exports equal net foreign investment. That is, any operations related to international payments should be equally change both parts of the equity, or only lead to structural changes in one of them.
Since the current account is still somewhat different from net exports, the balance of payments with respect to this equality can be reformulated as follows:
The significance of the current account must be equal to the value of the account of financial flows and capital movements with the opposite sign.
Thus, a negative current account balance is financed by income in the U.S. economy of foreign investment.
How this situation will be alarming?
If not mistaken, Greenspan has a saying: "No matter how much you need, it is important whether you can give." Until the world community has no doubt that the U.S. economy is solvent creditor concerns should not be. U.S. government securities, despite the low yield, remains one of the most attractive ways of locating the available funds, primarily due to its high reliability. In addition, the developed countries (especially in export-oriented economies) are not interested in causing the debt crisis in the U.S., since such a crisis strikes on them is much stronger than at the American economy.
What can balance of payments analysis to predict movements in exchange rates
Application of balance of payments data for fundamental analysis of currency market hindered the following circumstances:
• The balance of payments - are statistics that are published with a substantial time delay. Data on the trade balance went through one and a half months after the close of the reporting period (month), and data on the current account - after two and a half. Naturally, the factors that led to changes in the structure of the balance of payments, in terms of impact on the dynamics of exchange rates by this time already spent. Therefore, an analysis of the balance of payments can be much more useful in identifying general trends in the international movement of goods, services and capital flows and exchange rates than to predict.
• Statistical uncertainty in some periods is large enough, which puts on the credibility of the analytical findings.
In subsequent publications we will see what benefit can be derived from the analysis of balance of payments and related indicators.
Terminological inaccuracy appearing in the publication of balance of payments
As domestic sources of news can be found on the two main indicators - the trade balance and balance of payments. First published monthly, the second - a quarterly basis. By both measures in the U.S. huge negative values.
Terminology used is inaccurate, since "balance" must be balanced, ie Ideally the sum of its partitions must be equal to zero (debits equal to the loan, etc.).
What is the balance of payments (for example, U.S.)
The balance of payments (Balance of Payments, International Transactions) in fact to be known as the ratio between the sum of all payments made by the country to other countries for a certain period, and the sum of all revenue it received for the same period from other countries.
In abbreviated form, it looks like this.
Balance of Payments U.S. [Million. U.S. dollars, quarterly adjustments]
Source: U. S. Bureau of Economic AnalysisThose data are published, usually called "the balance of payments" in fact represent the current account (Current Account), which is one of the accounts of the balance of payments.
As it shows the operation:
• exports and imports of goods and services;
• The income of residents, coming from abroad (income from property and compensation for labor relations);
• ongoing payments to non-residents (income from property in the United States and compensation for labor relations);
• unilateral payments (grants, pensions, etc.).
Data on the trade balance - the difference between exports and imports of goods and services (in the analysis of previous publications, we use the term "net exports", which is more accurate). The values of the trade balance and current account differed slightly, and this difference is determined mainly by the amount of unilateral current payments.
Negative values of the current account should in any way funded.
Let us mentioned in one of the first publications on the FA equality
NX = NFI,
net exports equal net foreign investment. That is, any operations related to international payments should be equally change both parts of the equity, or only lead to structural changes in one of them.
Since the current account is still somewhat different from net exports, the balance of payments with respect to this equality can be reformulated as follows:
The significance of the current account must be equal to the value of the account of financial flows and capital movements with the opposite sign.
Thus, a negative current account balance is financed by income in the U.S. economy of foreign investment.
How this situation will be alarming?
If not mistaken, Greenspan has a saying: "No matter how much you need, it is important whether you can give." Until the world community has no doubt that the U.S. economy is solvent creditor concerns should not be. U.S. government securities, despite the low yield, remains one of the most attractive ways of locating the available funds, primarily due to its high reliability. In addition, the developed countries (especially in export-oriented economies) are not interested in causing the debt crisis in the U.S., since such a crisis strikes on them is much stronger than at the American economy.
What can balance of payments analysis to predict movements in exchange rates
Application of balance of payments data for fundamental analysis of currency market hindered the following circumstances:
• The balance of payments - are statistics that are published with a substantial time delay. Data on the trade balance went through one and a half months after the close of the reporting period (month), and data on the current account - after two and a half. Naturally, the factors that led to changes in the structure of the balance of payments, in terms of impact on the dynamics of exchange rates by this time already spent. Therefore, an analysis of the balance of payments can be much more useful in identifying general trends in the international movement of goods, services and capital flows and exchange rates than to predict.
• Statistical uncertainty in some periods is large enough, which puts on the credibility of the analytical findings.
In subsequent publications we will see what benefit can be derived from the analysis of balance of payments and related indicators.
Andrew Khamidullin
to Forex Magazine
fxtrade@tomsk.ru
to Forex Magazine
fxtrade@tomsk.ru
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