Economy Type - Price DriversThis week we are going to see how a country's type of economy can help predict currency moves. Trade Flow vs. Capital FlowThe strength or weakness of a country's currency is partly dependent upon whether their primary income is derived from trade flow or capital flow.Trade flow refers to how much income a country earns through trade. Capital flow refers to how much investment a country attracts from abroad. It is important to know a country's economy type as some countries are more sensitive to trade flows, while others are far more dependent on capital flows to support their economy. Trade FlowSome examples of Countries whose currency strength depends on trade flows include Canada, New Zealand, Australia, Germany and Japan.A significant portion of their growth is attained through the export of various commodities. In Canada, oil is the primary source of revenue, as they are the second largest supplier of oil to the US. Agricultural goods are a crucial source of income for New Zealand. In Australia, industrial and precious metals dominate trade. Trade flows are also important for other export dependent countries such as Germany and Japan. Capital FlowFor countries such as the US and the UK which have large investment markets, capital flows are of greater importance than trade flows. In the US, financial services represent about 40% of the total profits of the S&P 500.These economic giants are able to attract enough capital from the rest of the world to offset large trade deficits. This is important to know, as trade data has a limited effect on their currency value. The ResultKnow which type of income is the primary source of each of your pairs and you will be much better prepared for the results of changing commodity prices and economic data releases.Wishing you continued trading success,
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