China The Supreme Power Behind The Foreign Exchange Market Movement Article

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China The Supreme Power Behind The Foreign Exchange Market Movement

China has been playing a crucial role in Foreign Exchange Market. Why China is the power source behind the FX market? How China is going to influent the global financial market sentiment? How will FOREX market enacted to Chinese moves? Find out in this article

Author: Adam Wang

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By reviewing the FX major movement took place in the year of 2006, one conclusion can be drawled, China is the power engine who created the momentum, provided the beyond average volatility in FOREX market. A conventional example can be seen from the year long US dollar weakness against major European currencies. Here come three questions, first of all, why china has the tremendous influence in the FOREX market? and second, what move(s) are expecting from China in the year of 2007 and how will these move(s) impact the FOREX market?

The Red Power (Banking Effect, Allocation Effect)

As mentioned briefly in the paragraph above, China provided a comprehensive FOREX market direction in the past year. From Chinese Yuan revaluation to Chinese Foreign Reserve restructure project (from solely against USD to against basket of major and minor floating currencies), decisively created the path of the US dollar general movement. All these events indicated that China has gradually reduced its US debt purchase; thus, the demand of the US dollar has been significantly decreased since China started putting alternative “goods” into its global shopping cart. From the prospect of global money supply/ “cash flow”, hefty foreign investment funds have flooded into Chinese and other fast growing merging markets (INFLOW), while China deliberates reaching the solution of Foreign Exchange (Risk) diversification by increasing the flexibility of its currency, RMB which result the slower outflow to the United States and speedier outflow to European countries and other Asian countries.

In the simplified way in describing the China scenario, China, as a retail bank receives high volume and large quantity of deposits from Mr. United States and experiences rapid increase demand of bank loan from Mr. “Europa” and Ms. “Asiana” and knowingly decreases the lending services to the Mr. States. The China effect indeed results the cash outflow from United States (depreciation of USD) and inflow into European and Asian Countries (appreciation of EUR, GBP…). Distortion of the effect happen if and only if Mr. United States files an significant withdrawal request, similar scenario occurred in 1997, Asian economic crisis.

Anticipated Moves From China

China’s foreign reserve surpassed Japan’s last year to become the world largest and reached $1,066bn by the beginning of year 2007. 70% of this reserve is believed in US dollar mostly US Treasury Bonds. Treasury fixed income products offer stability but generate minimal interest return. The return can barely adjust the relatively high inflation cross the international and domestic markets. The likelihood is that China is going to shift investment from Fixed Income Instrument to more Mutual Fund and other instruments aboard. Which markets will be the top choice for this considerable size of investment fund? European market will be over US market. New York as the world financial center has experienced the decline share of the capital investment. A significant number of foreign companies choose to be listed in exchanges in UK, Euro, and HK instead of NYC.

There is an anticipated 7% lose of market share, which equivalent to 60,000 jobs in the next 5 year in NYC, the world financial center. The more restrict supervision on European Financial Market enhances investor, investor like China’s confidence in term of the security of the investment fund. In addition, Sino-America relationship is one of the factors on Chinese investment decision making. With Democrat took over the House and heated pressure to leader of China in request of Currency Reform and Monetary Reforms. China in response will react gradually and slowly and more importantly, China will seek the way to establish an enhanced friendship(s) with “friendlier developed countries” and to increase its influence in “developing countries”.

Fundamentally speaking, the anticipated Chinese movement is able to push the current Foreign Exchange Trend forward. In another word, dollar in the relatively long term will continuous its downtrend against major European currencies like Great Britain Pound and Euro and also minor floating Asian currencies. New highs of EUR/USD and GBP/USD are highly expected.

Copyright © 2007 PNX FOREX. All rights reserved.

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Investment Research Analyst of PNXFOREX.com

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