Monday, May 25th, 2020

Can You Profit from Currency Market Chaos?


The Forex markets are crazy these days as the yuan plunges along with many developing nation currencies. The ramifications of a cheaper yuan include increased Chinese exports and pressure on industries across North America, Europe, Great Britain and the rest of the world. In the meantime can you profit from currency market chaos? Let’s look at what is going on.

Plunging Yuan

The Chinese yuan is overpriced and the People’s Bank of China is letting its value fall. Unfortunately for the Chinese the fall of the yuan is not always pretty. Bloomberg Business reports that China steps up yuan intervention in order to maintain some control over the progressive devaluation of its currency.

China stepped up its defense of the yuan, buying the currency in Hong Kong and sparking a record surge in the city’s money-market rates to deter bearish speculators.

The People’s Bank of China repeatedly intervened in the offshore market on Tuesday, according to people familiar with the matter, following efforts to talk up the currency from two senior government officials on Monday. The yuan rose as much as 0.7 percent versus the dollar in Hong Kong, briefly erasing its discount to the onshore rate for the first time since October. The cost to borrow yuan overnight in the city’s interbank market surged to 66.82 percent, more than five times the previous high on Monday, as PBOC purchases reduced supply of the currency.

The problem for the Chinese is that even they do not have sufficient hard currency reserves to continually support a currency that wants and needs to fall to a valid market level. But, why is the yuan overpriced?

A Circle of Causation

When Chinese industry sees a decreasing demand for their products they order small quantities of raw materials (commodities) from their developing nation suppliers. In turn developing nations order fewer finished products from China, Europe, North America and Japan. With fewer orders from across the globe industries cut back further on orders for commodities in a downward spiral of causation. This is the nature of economies until there comes a point when things pick up. Knowing when that will help options traders profit from currency market chaos in the meantime.

Chinese Economy

The big sick man in Asia is China. The nation that posted ten percent year on year economic growth for decades is slowing down and not doing so very well. The New Yorker writes about China’s two big economic challenges.

The first task is restoring some stability to the country’s notoriously volatile markets. The second challenge, which is of much greater importance, is fixing the Chinese economy, which, for a couple of years now, has been looking a bit like Wile E. Coyote – stepping off a cliff and hovering in the air for a while, legs pumping furiously to defy gravity.

After more than two decades of tremendous growth, practically everybody acknowledges that China faces some serious problems: chronic overcapacity in many manufacturing industries; very high levels of debt, particularly in the corporate sector; the aftermath of a real-estate bubble in some parts of the country; and a rapid demographic transition that means the working-age population is now declining. Based on the history of other rapidly growing developing countries, a full-on bust would appear to be a real threat.

To the extent that China does not handle its economy and currency you can profit from currency market chaos as the yuan falls and other nations devalue their currencies to remain competitive in a downward spiral. The full blown Forex currency/trade war is not out of the question. As always do your own homework before trading options on foreign currencies.

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