A nation’s economic strength is measured through output called gross domestic product. Focus on the inflation adjusted “Real Gross Domestic Product”. When Real Gross Domestic Product (Real GDP or RGDP) rises, the nation’s output has increased since the last time it was measured. When Real GDP falls the nation’s output has decreased since the last time it was measured. The difference between the last measurement and the current measurement is called “Real Gross Domestic Product Growth”.

Rising Real Gross Domestic Product

A nation with growing Real GDP growth is strongly preferred by investors. “Smart Money” Investors anticipating strong future real GDP growth will purchase equity and real estate within that nation with the intent of selling them at a higher price. These purchases increase the value of the investments offered by the nation. As GDP increases Domestic citizens will typically also see an increase in income, and begin to purchase those same assets. Eventually, reactive “Dumb Money” investors will chase returns, boosting asset prices at the end of the cycle and possibly creating an asset bubble “Smart Money” investors use as exit liquidity. Both “Smart Money” foreign investors and “Dumb Money” foreign investors need to purchase the target nation’s currency to engage in transactions.

The money flowing into a nation’s economy results in inflation. Nations with strong GDP typically have higher exports (product and service sales to foreign nations), which results in capital inflows. Citizens can afford to pay more for goods, and producers can charge more for them. This slows the increases in the currencies demand and value. If comparing nations’ currencies where GDP growth is equal, the currency from the nation with more inflation is generally worth less over time. Strong projected rising Real GDP helps national currencies increase in value, as long as inflation is contained.

Falling Real Gross Domestic Product

A nation with falling Real GDP is avoided by investors. The smart foreign money will either withdraw capital from the economy before Real GDP starts falling or in the early stages of contraction. The dumb foreign money will typically be stuck selling during a downturn. Fleeing foreign investors will sell the nation’s currency to buy investments in stronger economies, hurting the currency’s value.

While GDP is falling a currency may suffer disinflation or deflation. Falling exports associated with contractions in Gross Domestic Product will stop the floods of foreign capital being converted to domestic dollars that are competing for local goods. Reduced access to capital hurts prices citizens can pay for goods, and producers are forced to reduce prices or slow increases in prices charged.

Exports are not the only source of inflation or deflation. Money printing can also create inflation by adding more money to the economy, reducing each existing unit of currency’s value. Think of currency value as a balancing act between the underlying economy, inflation, and the demand for that money.

American Markets Analysis:

• Summaries of American Economic Structure
• Performance of Major
• Imports/Exports
• Federal Reserve Mandate versus Expectations
• Performance Indexes of U.S Economy
• Economically Correlated U.S Dollar Projections
• Large Trading Fund Index Sentiment Readings
• Market Wide Earnings Versus Valuations
• Fundamental Ranking of U.S Business Sectors
• Best and Worst Future Consensus Estimates
• Occasional: Firm Fundamental Strength Report
• List of Technicals to Look for While Trading