Financial analysis

Most speculators, though admittedly not all, are trend-followers. Thus, the longer the fundamental trend continues, the more trend-following speculators are attracted to what seems risk-free profit and thus ultimately the more speculative the trend becomes. As the exchange rate continues to appreciate, nominal interest rates to decline and capital inflows to continue, so the other side of the balance of payments starts to deteriorate. The balance of payments must balance and therefore including errors and omissions, a rising capital account surplus must be offset by a widening current account deficit. Equally, real exchange rate appreciation must lead to external balance deterioration. For now, the deterioration is not sufficient to cause concern among fundamental investors and is more than offset by speculative inflows, thus the trend becomes self-fulfilling as more and more speculators join the trend.