Trade Imbalances And MXN To USD Exchange Rate Shifts

To be a forex trader, you must learn what makes the exchange rates of different currency pairs move as they do. That can help you capitalize on the changing rates to increase your chances of getting a profit. Many factors can influence the changes in currency exchange rates. Arguably, the most important one is the trade balance. 

In our discussion today, we will explore how currency exchange rates work. We will also discuss trade imbalances and learn how they affect currency exchange rates, especially in pairs such as the MXN and USD. Stay tuned for some advice on capitalizing on these changes during your trading. 

Here is the best guide on leveraging trade imbalances for success in forex trading. 

Understanding How Currency Exchange Rates Work 

 

Currency exchange rates are the quotation of how much of your currency you need to give to get the currency you want.  

These exchange rates are what influence the conversion of one currency to another. So when you want to exchange your Mexican Peso for US Dollars, you need to know how much of your pesos you will give to the exchange bank to get a specified number of dollars. 

The exchange rate often changes a lot during trading. These changes help a forex trader make money by converting one currency to another. For example, when converting MXN to USD, a trader can wait for the exchange rate to be low to get more dollars for a low amount of pesos. 

But the question one should ask themselves is what makes these changes happen. And the answer lies in understanding the concept of trade imbalances. 

The Concept Of Trade Imbalances 

 

Trade is one of the most important factors that influences the way the currency of a country performs. Countries trade with each other in the modern business landscape through exports and imports.  

 

Basically, a country with more goods of a particular kind than it needs can export these goods to another country that does not have as much. Countries with very little of a specific product to satisfy their needs might also need to import more to make ends meet. 

When a country exports and imports goods of equal value, that country can be considered to have a balanced trade, however, when these values are unequal, the country experiences a trade imbalance.  

There are two main types of trade imbalance, and we shall discuss them below. 

Trade Deficit 

 

A trade deficit happens when a specific country imports more goods than it exports. That means that the country's goods are not that popular with other countries. That can affect the country's earnings since it buys more than it sells. 

Trade Surplus 

 

On the other hand, a trade surplus happens when a country exports more goods than it imports at a given time. A trade surplus shows the goods a country has to sell, like hot cakes. That can indicate the country's success in the global market and positively affect its earning potential. 

Possible Effect Of Trade Imbalances On Exchange Rates 

 

The question then becomes how trade imbalances affect the exchange rate between MXN and USD. Let’s break that down for you. 

 

The trade between Mexico and the US affects the performance of the respective currencies of these two countries. Since the value of a currency based on the exchange rate depends on the comparison between these two countries, the value of trade between the two countries is a significant factor to note. 

Let’s consider an example where the US buys avocados from Mexico and sells coal products to them. If avocados are more popular in the US than coal products are in Mexico, then it means that Mexico will export more to the US than it imports from the US. What does this mean? Mexico will have a trade surplus, and the US will have a trade deficit. 

Remember that the US has to buy avocados in Mexican Pesos while Mexico has to buy coal products from the US in US dollars. Therefore, since the US needs more avocados to satisfy its local needs, the country will have to get more Pesos to buy avocados.  

That means there will be a higher demand for pesos than for dollars. Following the law of supply and demand in economics, the value of pesos will increase since they are in higher demand. Ultimately, the exchange rate between MXN and USD will be such that you need fewer pesos to get more dollars.  

As a trader, paying attention to trade imbalances can help you make the best trading decisions. When you realize a higher demand for pesos, you should convert your USD to MXN. That is because the value of MXN is more elevated than USD at that particular time! 

 

Bottom Line 

 

Trade imbalance affects how the exchange rate of two currency pairs shifts. You should be constantly aware of the changes in how countries trade with each other if you want to capitalize on the trade imbalance in your trading.  

But remember, trade imbalances are not the only thing that affects exchange rates. So, you must pay attention to all of the factors around currency trading if you want to be successful at it.