Forex Trading with the US Trade Balance Figures

Forex Trading with the US Trade Balance FiguresUsing the United Sates balance of trade figures to forecast the exchange rates between currencies would have to be considered as a fundamental analysis technique that could have value for forex traders.

The theory behind using these figures is simple. When an economy is in a position of a trade deficit, the value of that country’s currency will decline in comparison to that of an economy where a trade surplus is present. This has the effect of making the goods and services of the economy with the surplus more expensive, which will influence a swing toward a return to a balance between the two economies that usually results in an overcorrection in the other direction.

The United States has been running a trade deficit for years. Australia and New Zealand have periods of surplus, along with periods of deficit. Knowing this, it would be tempting for a forex trader to sell currency pairs containing the USD as the quote currency with the expectation that the dollar will continue to get weaker as the U.S. trade deficit continues to expand. It would likewise seem logical to buy currency pairs with the USD as the front currency.

Balance of trade statistics can be displayed on a chart exactly like those used to show forex exchange rates. If comparing the two side by side, it would be obvious that when the U.S. trade deficit reduces, it does so by billions and even 100s of billions of dollars. If this reduction coincides with the AUD or NZD moving toward a deficit condition, the USD will gain value against the AUD and NZD, countries where the total annual GDP represent only a fraction of the deficit the United States reports on a monthly basis.

Using balance of trade figures to forecast forex prices certainly has value for traders as long as some caveats are kept in mind.

First, this should be considered as a long term indicator. The size of the U.S. trade deficit does fluctuate constantly, but the day to day variations would be extremely difficult to predict to any extent that would benefit forex traders who only occasionally hold trades for more than a few days.

Second, for the shorter term trading that most technical traders favor, the exact timing of when a change in the trade deficit will produce the desired effect on the currency is almost impossible to predict accurately and reliably.

Finally, no one indicator alone should be relied upon. This is true not only for long-term fundamental indicators like balance of trade, but also for short-term indicators like moving averages and stochastics.

Using balance of trade statistics to get a distant overview can be effective for revealing long-term trends. Combining this with indicators that uncover shorter term price fluctuations can be an extremely effective trading strategy, but to base a trade of a few minutes or hour’s duration on a fundamental indicator alone could conceivably result in drawdowns far beyond the ability of the trader’s account equity to withstand.

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