Explain how the flows recorded in the balance of payments move exchange rates

Every balance of payments flow creates demand for, or supply of, a currency, and a current account deficit is matched, apart from statistical discrepancy, by a surplus on the capital and financial accounts, that is, by net inflows. Over long horizons persistent deficits tend to weaken a currency: foreigners accumulate claims on the country and eventually want a lower price or higher return to hold more, the portfolio balance view. Over short horizons capital flows usually dominate, because financial flows dwarf trade flows and can reverse fast. Surges of inflow into emerging markets can lift the currency and asset prices, followed by sharp reversals. The trap is assuming a deficit means immediate depreciation; if capital inflows more than finance it, the currency can rise for years.