Trade Balance and Currency Markets: Another Example

Last time I commented on the trade balance and its effects on currency markets, the idea was that a trade surplus is usually good for the currency while a trade deficit is usually bad. Given that most of these effects are anticipated, then what matters is the extent that the data release differs from forecasts. To that end, an example using the Japanese trade balance was used.

Earlier today Japan published its August trade balance data. Given that the last post examined the reactions of major currencies, now we will deal with some lesser-traded JPY pairs, as well as the USDJPY. As the image suggests, the market response is large and immediate across all currency pairs. In particular, USDJPY rose by 20 pips, CADJPY surged 26 pips, and CHFJPY increased by 22 pips, while AUDJPY jumped by 42 pips. Overall, the reaction was as predicted last time.

Last time, the post also suggested that a trade deficit is usually good for the stock market as it suggests that consumer spending has increased and thus firm profitability will follow. The JPN225 increased by 1.14% around the announcement time, also abiding theory.

Overall, the trade balance appears to once again meet the criteria of being one of the most reliable predictors of currency movements and one which deserves to be in a trader’s arsenal.

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Dr Nektarios Michail

Market Analyst


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