The trade balance is one of the most important statistics available to a fundamental analyst. It states the import and export balance of a nation, or the deficit or surplus registered as the sum of import costs, and export revenues. Trade balance is a component of the current account (which is released separately).
Presence of a trade deficit implies that an economy is unable to cover its external purchases with the receipts from sales. The deficit must be funded from tourism revenues, external transfers, foreign aid, or the outright sales of domestic assets, and if none of these is met, the currency will depreciate.
A trade surplus, on the other hand, implies that the trade segment of the economy is running like a profitable company. Each year generates a surplus, which can then be invested overseas in asset purchases, direct investment, or recycled through credit channels at home in order to generate low cost credit to businesses and consumers. If the trade surplus does not finance external purchases of assets, it is likely that the currency of the nation will appreciate (as trade receipts are exchanged in the domestic market, there will be a surplus of forex, leading to appreciation of the national currency.)
A trade surplus is thought to be associated with an appreciating currency, but this is rarely the case nowadays since exporter nations prefer to dampen the attractiveness of their currencies by intervening in the market, and carry traders help them in the process. Conversely, although a trade deficit would be expected to result in a depreciating currency, it is not always the case since high interest rates that must be maintained in order to finance the deficit are often attractive to carry traders and other speculators who choose to sustain the value of the currency against other economic actors.
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