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Balance of payments

The full accounting of a country's transactions with the rest of the world, split into the current account and the capital and financial accounts, which must offset each other.

Every transaction has two sides, so the accounts sum to zero apart from statistical error. A country running a current-account deficit is necessarily importing capital to fund it, whether through foreign purchases of its bonds, direct investment, or a drawdown of fx-reserves.

That identity is the useful part for a currency trader. A deficit is not in itself bearish; what matters is the quality of the financing. Long-term direct investment is stable money. Short-term portfolio inflows chasing a yield gap can leave in a week, and a currency funded that way is fragile to a change in the interest-rate-differential.

Crises typically appear as a sudden stop, where the inflow that was funding the deficit simply ceases and the exchange rate has to do the adjusting.

Example: a country runs a current account deficit of 5% of GDP funded by portfolio inflows. If those inflows halve, the currency has to fall far enough to compress imports and attract the rest, which is rarely an orderly process.

Related: current-account, capital-account, fx-reserves, emerging-market-currency

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