What are Capital Flows?
Capital Flow
Forex Trading Glossary
Quick Answer: Capital flows track money moving across borders for trade and investment, creating sustained demand for a currency.
What are Capital Flows?
Capital flows measure money moving across borders for investment, trade, or speculation. Sustained inflows create demand for a currency because investors must purchase the local unit to buy domestic assets.
Types of Flows
- Foreign direct investment: Companies building facilities overseas.
- Portfolio flows: Global investors buying bonds and equities.
- Hot money: Short-term speculative flows that react quickly to yield changes.
- Official flows: Central-bank reserve diversification.
FX Impact
High-yielding economies often experience persistent capital inflows, providing a structural bid for their currency.
Monitoring Capital Flows
- Balance of payments: Review current and capital account data each quarter.
- Bond auctions: Track foreign participation in sovereign debt sales.
- Equity performance: Global funds chase markets with strong corporate earnings.
- Policy changes: Taxes and capital controls can redirect flows overnight.
Related Terms
Learn More About Forex Trading
Now that you understand capital flow, explore our comprehensive guides: