HOW GLOBAL POWERS MANAGE THEIR FOREX?
The main Forex traders around the world know that one of the main keys to making consistent profits in the Forex market is the ability to detect market trends.
This is because in Forex, we are dealing with the “lowest common denominator” of any country, which is the currency of the country. Therefore, it is advisable to understand the dynamics of how these countries operate. For the purpose of this article, we will explore 2 of the most important nations in the world today: The United States and China.
Over the past two decades, the world’s economic engine has depended on the following model:
United States (Imports and expenses)
China (exports and savings)
The coin that was mostly used during 2006 was “Chimerica” as told by Niall Ferguson, in his very famous book which almost read by every single person “The Ascent of Money”. This actually represents the subtle relationship between two of the world’s largest economies.
According to the 2009 CIA World Factbook list, the United States is the largest economy in the world, with an annual GDP of approximately USD14 billion. Japan ranks second with USD5 billion and China ranks third with a score of USD4.7 billion. Predictions are already supporting China to surpass Japan as the second largest economy in the world by the end of 2010.
Now, the previous model worked on the fact that EE. Buy many more products from China than what China buys from the USA. In fact, according to current standards, the demand in the USA. Chinese products exceed the demand for US products in China by almost 500 percent.
This converts to the USA. In the largest individual buyer of exports that drive growth in China. China, in turn, invests excess profits from its exports of goods such as toys, clothing and steel primarily in US Treasury securities.
This permits China to stock its profits in amongst the largest and most liquid financial markets in the world, without the need to convert between currencies. Meanwhile, the recycling of surpluses in Treasury instruments helps to finance the continued spending of the US.
Essentially, in the last two decades, the United States and China have developed a special relationship based on the “security” of US debt. The United States gives China access to the richest consumer market in the world, which in turn absorbs mass production of Chinese consumer goods.
This not only provides income for Chinese exporters, but also helps ensure social stability in China by providing employment, which is the main objective of Beijing’s economic policy.
All this is fine and elegant, so far. With the attack of the global financial crisis of 2008-2009, the roles have changed significantly. The power has changed.
This is how I perceive the next two decades to be:
USA (Exports and savings)
China (imports and expenses)
This is a total role reversal compared to the previous model. In fact, it is already happening.
The United States is now going through a period of intense leverage. This basically means that the average American would be saving more than he would be spending. President Obama is also trying to boost exports in the United States to stimulate economic growth.
Exports currently represent 6% of its GDP. Obama is trying to bring it to 12% to boost the economy.
In addition, here are some main examples that support the new model of “United States exports and savings, imports and expenditures of China.”
1) China’s demand for commodities
On January 2, 2010, Bloomberg reported that in 2009, commodities registered the greatest annual increase in four decades, led by a doubling in the prices of copper, sugar and lead, as Chinese demand offset the decline more long in the world economy since World War II. China’s thirst for commodities and raw materials was, and remains, insatiable.
2) China’s car sales exceed US.
On January 10, 2010, CNBC and Bloomberg reported that, for the FIRST time in history, Chinese vehicle sales exceeded those of the US. For the year 2009! This feat underscores China’s importance for the global automotive industry as the world’s largest market. In 2009, a record 13.6 million units were sold in China, compared to sales of 10.4 million cars and trucks in the United States.
** Cool update:
At the time of this publication, Geely has just signed an agreement with Ford to buy Volvo for USD1.8 billion.
3) China decreases its US debt holdings
China’s investment in US government securities. It fell by $ 34.2 billion in December to $ 755.4 billion. The decline is GREATER in a decade. On the other hand, Japan’s holdings increased 1.5 percent to $ 768.8 billion, which makes it the largest creditor in the United States. It is also interesting to note that December marked the second DIRECT month in which China became a net SELLER of US debt.
4) China increases the credit reserve requirement for banks
In its clearest signal about the cooling of its economy to red hot, China ordered banks to reserve more deposits as reserves for the second time in February. This policy announcement came after 2 important news:
– Loan growth: banks extended ONLY 19% of the loan target of 7.5 billion yuan this year in January 2010
– Property: Fears of an imminent asset bubble are coming after China recorded that property prices rose more in almost 2 years.
Still not convinced about Forex?
Did you watch the 2012 movie? Did you notice the clever “background” that showed the “change in economic powers” from the United States to China? I rest my case.
So what does all this ultimately mean? Especially for a Forex trader? Here are my thoughts:
1) Wealth is coming to Asia. In fact, the next decade will record the largest transfer of wealth to Asia in the history of the world. Asia is ready to be the center of world wealth.
2) USD4 billion are traded daily in the Forex market, which makes it one of the best platforms in the world to create wealth.
Let’s put those 2 points together, okay? Wealth is coming to Asia; and we are on the platform of the world’s largest financial market: FOREX.
All we have to do is to step firmly on this platform called FOREX, and the wave of wealth will lead us all to financial prosperity if we only recognize its immense power.
This is leverage in its highest and purest form.