Foreign currency and current account

<body><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td> <font face="garamond, times new roman, times" mstheme> <p> Current Account </p> <p> </p> </font mstheme> </td></tr></table><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td valign="top" width="1%"><font face="garamond, times new roman, times" mstheme> <p> </p> </font mstheme></td><td valign="top" width="24"></td><td valign="top"> <p>This page uses frames, but your browser doesn't support them. </p> <p><font face="Arial Narrow" size="2" color="#C0C0C0">F<strong>orex: Balance of Payments</strong></font></p> <p><strong><em><font face="Arial Narrow" size="2" color="#00FF00">Buy when the coloured lines are at the low end of their range, </font><font face="Arial Narrow" size="2" color="#FF0000">sell when they are high</font></em></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">This is a "what-if" tool that is intended to highlight currency cycles that are ultimately self-correcting owing to lagged effects on the balance of payments. It is designed to show the risk to the exchange rate based on the payments deficit on current account, including a Best Guess as to future developments. For comparability, exchange rates have been rebased to set year-end 1994 at 100.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">In each chart the currency index is shown as</font><font face="Arial Narrow" size="2" color="#FFFFFF"> the thick white line </font><font face="Arial Narrow" size="2" color="#C0C0C0">on the right hand axis. The main explanatory variable, the balance of payments on current account, shown as </font><font face="Arial Narrow" size="2" color="#FFFF00">the thin yellow line</font><font face="Arial Narrow" size="2" color="#C0C0C0">, uses the left hand axis. A Best Guess as to the future development of the valuation ratio is also shown on the left hand axis, as </font><font face="Arial Narrow" size="2" color="#FF0000">the thin orange line</font><font face="Arial Narrow" size="2" color="#C0C0C0">.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Best Guesses suggest what is widely expected to happen to the ratio of the balance of payments on current account to GDP, assuming constant exchange rates. Forecasts are based on consensus estimates the current account and GDP.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Please note this is a lagging indicator, where forecasts of the balance of payments are likely to be self-defeating, through pre-emptive changes in exchange rates. Such "what-if" analysis should be interpreted for its usefulness in predicting the likelihood of currency movements. Owing to its lagging nature, this indicator is not a component of the econometric forecasting model. Comparisons between countries are of limited usefulness, owing to differing long-term trends in capital flows. </font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">See also the relevant <a href="ChartFrame_real_effective_exchange_rate.htm" target="_top">Valuation</a> chart to study in greater depth the cyclical patterns that frequently arise through the J-curve effect on the balance of payments, whereby initial price effects may "justify" and serve to exaggerate movements in the real effective exchange rate before countervailing volume effects create offsetting movements up to two years later.</font></strong></p> <p><strong><font face="Arial Narrow" size="2" color="#C0C0C0">Owing to the conversion of legacy currencies into Euros, analysis is provided on the common currency, rather than for individual countries. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit.</font></strong></p> <hr color="#FF0000"> <p align="center"><font size="2">[ <a href="global_asset_allocation_sitemap.htm" target="_top">Site Map</a> ] [ <a href="index.htm" target="_top">Home</a> ]</font><font size="2" face="Arial"><br> </font><font size="2">[ <a href="Chart_Library.htm" target="_top">Chart Library</a> ] [ <a href="ChartLibrary_foreign_currency.htm" target="_top">Forex Charts</a> ]</font> </td></tr></table><table border="0" cellpadding="0" cellspacing="0" width="100%"><tr><td><font face="garamond, times new roman, times" mstheme> <p align="left"><font face="Arial Narrow" size="1" color="#C0C0C0">Copyright © 1999 Professional Investment Tools Ltd., authorised by the Financial Securities Authority. An Independent Financial Adviser. Please read Financial Health Warning and Licence Agreement. UK laws apply exclusively. Principal sources: Consensus Economics, Corel Corp., FIBV, Global Financial Data, PIT, national governments and stock exchanges. Information and opinions are based on sources believed to be reliable and accurate. However PIT does not guarantee this to be the case, and does not accept liability for any loss arising. This is for information only and does not constitute a solicitation to deal in any securities. Opinions are liable to change. Past performance is no guarantee of future success. Last modified: January 05, 2001</font><font face="Arial Narrow" size="2" color="#C0C0C0"><strong>.</strong></font></p> </font mstheme></td></tr></table></body>