Savings Investment Imbalances approach explains currency movements in terms of the effects of domestic savings/investment imbalances on the exch rate. - If currency related trends change, current account position must change too and exchange rate moves to achieve that - If economy suddenly begins to expand - domestic savings does not change, there will be excess demand for capital as inv tries to exceed savings. - Only way inv can exceed savings is for foreign savings to be used. So if foreign savings are being used to bridge the current account gap, does that increase the current account deficit and the currency will depreciate?
So the idea is investments in a country can happen by savings from its citizens + investments from outside. If savings rate is not enough to support investments, then one needs foreign capital/investments from outside. Essentially the foreign investor is selling their home currency and investing the currency of the country investor is putting money in. So currency should appreciate.
good way to put it BTON, inward capital flows do tend to create currency appreciation followed by busts when flows reverse. There are many Asian countries that are prime examples of this , especially in the 90’s