From The Free Forex Encyclopedia
Trade balance measures the ratio of exports to imports for a given country's economy. If exports are higher than imports (a trade surplus), the trade balance will be positive. If imports are higher than exports (a trade deficit), the trade balance will be negative.
Knowing the exchange rate is obviously critical for any foreign exchange trader, but information on the net exports in a country can help to predict future trends in inflation and foreign investment, and thus can give clues to the future behavior of any given currency market.
Trade balance is derived primarily from three factors:
- The price of goods in a country
- Tax and tariff levies on imported or exported goods
- The exchange rate between two currencies.
This last factor is fundamental to foreign exchange trading. Since the trade balance depends so heavily on the current state of exchange rates between two countries, trade balance is a key coincident indicator for the state of a foreign exchange asset market.
There are a number of measures for trade balance, but one of the chief sources of information on the state of trade in the US is the International Trade report released monthly by the Census Bureau and the Bureau of Economic Analysis. This report is released around the third week of every month and details the performance of several exported goods and services in various sectors of the economy.