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Current account balances

Current account balances also influence currency valuations. A country running a current account deficit is importing more than it is exporting and / or borrowing more than it is saving.

Economic theory argues that this imbalance can be addressed by a weaker currency, which would make exports cheaper and imports more expensive. The opposite is the case for an economy running a current account surplus.

While correct in theory, this tends to be a longer term indicator of currency trends. Indeed, the US economy ran a significant current account deficit through the 1990s while the USD appreciated relentlessly courtesy of the productivity boom.

Nonetheless, at times, financial markets still worry about these issues.

 

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Source: LatitudeFX Limited

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