Guide for Forex Traders

Trade and Capital Flows and Forex Investments

Predicting forex trends is vital in trading. And we should be updated about the relevant events that go on in the country that hosts the currency we're trading in. We also need to know how the country manages its economy - whether it is through trade or capital flow - because these are crucial for our forex investment.

When a country's economy is maintained by trades it does within and with other countries it is sustained by trade flows. When it is sustained by investments being brought into it from other countries - attracted by low interest rates, tariff considerations, more and easier credit access, and other perks - then that economy is capital flow dependent.

Economies sustained by trade flows are often stronger that those sustained by capital flows. Trade flow economies are often independent economies that influence global currency trends. We watch what these economies are doing because their activity directly affects the strength and value of their currencies and it is these currencies that are often worth investing on.

The currencies supported by trade flows derive strength and value through the gains in their trade locally and internationally. Local trades pertain to marketing of local commodities produced and consumed locally. Whatever surplus derived from this is exported to other countries.

For instance, Canada produces oil locally and supplies the same locally. The surplus is then exported to other countries. Australia has its big industries and high-yield metals while New Zealand has agricultural products. Export dependent countries often have strong currencies which a lot of trade speculators seize opportunities with their forex investment.

Capital flow economies are sustained by foreign capital that establishes investments in those countries. However, because such investments are not locally based the host country does not benefit much from them. The currency is not strengthened as when it is spurred by trade flows. What foreign investments do mostly is provide jobs but the exports of the host country are not improved.

When we choose what currency to deal with we have to know the economic background that sustains it. The best thing is to invest on a currency supported by trade flow more than it is by capital flow. It is also a good thing to borrow using a currency with a weak value and use this to buy into a currency with high value.

So when making a forex investment we have to make an economic background check on the currency. Those dependent on trade flows are the better option.