Investing this morning reported that USD/JPY rose during Asian trading after Japan's current account deficit hit a record high in December. What is the meaning of current account deficit for price movements in forex market? We know that the term deficit generally has negative meaning, but what is it refers to?

Investing this morning reported that USD/JPY rose during Asian trading after Japan’s current account deficit hit a record high in December. What is the meaning of current account deficit for price movements in forex market? We know that the term deficit generally has negative meaning, but what is it refers to?
tradeExport Versus Import Has High Impact
Trade balance is well-known as one of several economic indicators that affect forex trading. Trade deficit refers to the difference between import and export, where a country imports more than it exports. Trade deficit that get higher from time to time shows a country growing dependence on others. It builds negative sentiment toward said country's currency. Beside of that, high imports mean the country will need more foreign currency to pay for imported products, and so their own currency tends to depreciate.

Currency movements, apart from influenced by trade balance itself, are also affected by other fundamental releases in conjuction with export-import, such as business surveys, PMI (Purchasing Managers' Index), and Industrial Production. A perfect example is China Manufacture PMI data release. A rising PMI signals increasing business activities which imply that China is going to import more from their trade partner, like Australia and New Zealand. This is a good news for those countries, because it will pick up their exports. Contrarily, lower-than-expected PMI will make the market worry about Australia and New Zealand exports in the next period, and so Aussie and Kiwi receive negative impact of the decreased PMI.

Moderate Influence of Balance of Payment
Balance of Payment comprises of two parts, that is Current Account and Capital Account. Current Account encompasses the difference between exports and imports as well as investments flows into and out of the country. Rising Current Account deficit as experienced by Japan means that Japan continue to rely on foreign funds and goods in their business activities. This is why the Yen weakened; apparently Abenomics has not reached its target.
yenThe second part of Balance of Payment, Capital Account, consist of Foreign Direct Investment, other investments, and Reserve Account. Because Capital Account represents capital inflow and outflow, excessive deficit and surplus both has bad impact on the economy. What's good is a dynamic improvement from both sides (inflow and outflow). Because of its intangible quality, Capital Account by itself has zero impact on forex. It has an effect only as a part of Balance of Payment. However, it should be noted that the amount of money in Reserve Account are really important for developing countries. For instance, in Indonesia, the highs and lows of Reserve Accounts has low to moderate impact on Indonesian Rupiah (IDR).

Unavoidable Budget Deficit
Budget Deficit come from the difference between state revenue and expenditures. In another word, budget deficit means that the government spends more than it earns. The government funds the deficit by issuing sovereign bonds. The amount of deficit is an important part within GDP (Gross Domestic Products).

There are many economist and analyst debating the pros and cons of budget deficit. The pros often said that no country can afford development without a bit deficit. While their opponent are holding on opinion that budget deficit means we leave a legacy of debt for our children and grandchildren. Despite of the debate, big economies like the US continue to borrow a large sum of money to funds budget deficit. This is the background of debt ceiling dispute in the US Congress. On one hand, if Congress refuse to up the ceiling, then US old debts won't be paid (default). On the other, elevating the ceiling means that they are going to maintain budget deficit.

Because of its common use, budget deficit has low influence on spot forex trading. The impact of budget deficit toward currency exchange rate occurs during what economists called as 'crowding out'. It is when budget deficit result in increasing interest rates, reduced private investments, dropped exports, and weakening exchange rates. Therefore, its influence apparent in long-term and in relation with economic indicators like GDP.

It could be said that although they are equally deficit, the influence differ between one another. Trade deficit is far more significant in its influence in forex market than budget deficit and balance-of-payment deficit.

Related Articles: