Microeconomic Indicator in FOREX:
What is Current Account?
Current Account is one of the two essential components of a country’s Balance of Payments, the other one being the Financial Account or Capital Account. It measures the net imports and exports of goods & services, net primary income like the payments received from investments abroad and net cash transfers. Basically, Current Account is a record of a country’s transactions with the rest of the countries around the world.
Current Account explains how a country is doing economically. If a country has surplus balance in its Current Account, it means that the country is a net lender to the rest of the world. Likewise, if a country has a deficit balance in its Current Account, it means that the country is a net borrower. Being a net borrower and having a deficit Current Account is not always a bad thing. The countries with surplus Current Account balance are funding the economic activities of the countries with deficit Current Account. These countries with deficit Current Account, are most likely importing more resources to invest in future and use those resources for internal growth. These countries will eventually turn their Current Account to surplus as they start exporting more. It is all a part of the economic cycle. If a country has a deficit in Current Account, it must be balanced by a surplus on the Financial Account.
Current Account has three important components: Trade, Net Income, and Direct transfers.
Trade is the most important component of the Current Account of a country. A trade deficit can alone lead to the deficit in Current Account, and it can offset any of the surplus generated by the other two components.
Net Income is the income received by the country’s residents minus income paid to foreign nationals. If the income obtained by a country’s individuals, businesses, and government from foreign countries are more than the income paid out to them, the net income will stay positive. If contrary, it contributes to a deficit in the Current Account. Direct Transfers are the payments made by the workers working abroad to their home country. These direct transfers also include FDI’s and the government’s aid to foreign countries.
What does the Current Account of a country measure?
The Current Account of a country measures the inflow and outflow of goods & services, investment incomes, and transfers on the balance of payments. It measures the difference in value between imported and exported goods & services and thereby measuring the economic condition of that country. If a country has a Current Account surplus, it means its exports are higher than its imports and vice-versa.
Reliable sources of information on ‘Current Account’ for Major currencies:
A lot of information about Current Account of major economies provided in the below. You can familiarise yourself with the Current Account statistics of the respective country along with the historical data related to that. The Current Account of one country can be compared to the others by using a comparison tool in this web portal. The historical Current Account data of a country is provided in graphical representation, and this will give you a clear understanding of how this data changed over time. There are more tools that can help you change the graphical representations according to your preference. A lot more information related to the latest news in that regard is provided to give you a better understanding.
GBP (Sterling) – https://tradingeconomics.com/united-kingdom/current-account
What do traders care about the Current Account and its impact on the currency?
The Current Account, being one of the critical components of the country’s balance of payment, is directly linked to currency demand. An increasing surplus in the Current Account indicates that foreigners are buying more of the domestic currency in order to make transactions in the country. Also, the surplus in Current Account can be interpreted as the surplus in the exports made by the country. This means foreign countries will have to buy more of the domestic currency in order to pay for their imports. This will increase the demand for the country’s currency and will eventually strengthen it. So the health of the currency and the Current Account are correlated. Traders tend to watch the status of the Current Account and if it has been in surplus or deficit in the recent past.
Frequency of the release
The Current Account statistics of different countries are released by different boards. Hence the frequency of release and publish dates differ from county to country. This data is generally released either on a monthly or quarterly basis. The issue dates for respective countries also varies. Below is the list of release frequency & publish timelines for the respective countries.
GBP (Sterling) – Released quarterly, about 85 days after the quarter ends.
AUD – Released quarterly, about 60 days after the quarter ends.
USD – Released quarterly, about 75 days after the quarter ends.
EUR – Released monthly, about 50 days after the month ends.
CAD – Released quarterly, about 60 days after the quarter ends.
NZD – Released quarterly, about 80 days after the quarter ends.
JPY – Released monthly, about 40 days after the month ends.
The Bottom Line
Countries with prolonged deficits in Current Account often comes under increased investor scrutiny when there is uncertainty in the market. The currencies of such countries often come under speculative attack during those times. Foreign exchange reserves will be exhausted to support the domestic currency and that combined with a declining trade balance puts extra pressure on the currency. So countries with a deficit in Current Account must often take strict measures to support & strengthen the currency, like raising interest rates and reducing the currency outflows, etc.