Current Account

The Current Account shows the total inflow of new capital into a country. It is calculated as the total Trade Balance (exports minus imports), plus the net of income payments (interest and dividends), plus all unilateral transfers (foreign aid, taxes, and one-way gifts). If the resulting number is positive, it shows a Current Account surplus; a negative value is a Current Account deficit. Note that a deficit indicates that more capital left the country than entered the country in the form of exports and other transfers.

Effect on the Markets

FX Market

Continued Current Account deficits can have a negative impact on the currency for the same reasons cited for Trade Balance deficits; when in a deficit situation, the country is forced to convert native currency to the currencies of other countries. This increases the supply of native currency resulting in a devaluation against other currencies.

Bond Market

If a Current Account surplus exceeds expectations, this may be interpreted as an indication that the economy is entering a period of inflation. To combat this, an interest rate increase may be the Central Bank’s response, causing investors to sell-off bonds.

Stock Market

When there is an influx of capital into a country some of this money will invariably find its way to the markets as new investments. A surplus also suggests a strong economy which often leads to increased investment in equities.

Market Relevance

Low for Bonds – Moderate for Stocks and FX

When Published

Monthly

Volatility

Low