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5. THE BALANCE OF PAYMENTS APPROACH

According to the Balance of Payments theory, changes in a country’s national income affect the country’s current account. Consequently, the exchange rate is adjusting to a new level to achieve a new balance of payments equilibrium.

Before moving forward, let us define the balance of payments and the balance of trade.

What is the Balance of Payments?

The balance of payments is a general account that incorporates all the payments and receipts of the residents of a country in their transactions with residents of foreign countries. This account includes a great variety of transactions:

(i) Traded goods and services

(ii) Income from foreign investment

(iii) New investment

(iv) Foreign aid

(v) Capital flows between central banks and treasuries (cash or gold)

Following the Smart Money -The Six (6) Indicators

Traders who can recognize and follow the movements of smart money can improve significantly their trading performance.

What is the Smart Money?

Smart money can be defined as the capital invested by traders with expert knowledge and often with inside information. Smart money can spot trends before others and trades basically against the general market sentiment.

Smart Money and the Foreign Exchange Market

The Foreign Exchange market is a decentralized (OTC) market and that means there is no track record of the aggregate trading activity. That makes things even more difficult to identify the smart money movements. However, there are quite a few indicators providing insight into where the smart money is flowing.

This analysis includes the following indicators:

1. Following the Long-Term Circles of Unemployment, Inflation, and Growth
2. COT Analysis (Commitment of traders)
3. The US-Dollar Index (USDX)
4. The CBOE Volatility Indexes (VIX & Skew Index)
5. The Treasury Bills Correlations
6. Contrarian-News Approach

CENTRAL BANKS AND WEBSITES

 A central bank is an institution providing financial stability for the economy. Central banks are responsible for implementing their country's monetary policy by adjusting the level of interest rates.

• Central banks adjust the level of interest rates to achieve price stability and high employment in the economy
• Most major central banks target a 2-3% annual inflation rate

Responsibilities & Policies