Why current account surplus results in higher FX rates?

Hi everyone,

On question 18 of the capital market and expectations reading, it says that we can expect higher foreign exchange rates for a country with a higher current account surplus.

My understanding: larger current account surplus = more net exports = higher rates = lower FX = more exports

Can someone please explain? the solutions don’t go into detail …

Thank you

What do you mean by ‘rates’?

Basically, a CA surplus means you have more demand for your currency relative to other currencies, so the currency appreciates to close the gap. Unless you’re China.

A larger current account surplus implies high net exports. But remember that the suplus also implies reduced imports which doesn’t require the borrowing of foreign currency to meet deficits (since it’s a surplus) thus reducing the demand for foreign currency relative to the home currency. Thus foreign currency depreciates and the home currency appreciates.

Also remember that a CA surplus is simply the nations savings minus its investment. Savings > Investment => Higher rates of interest in the nation => FX flows into the nation’s currency which makes the home currency appreciate => Selling foreign currency.which depreciates it.