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Currency Wars

Posted by Wayne Ko on December 9, 2016 at 12:00 AM


Top Forex traders worldwide know that one of the major keys to consistent profits in the Forex Market is the ability to spot market trends.

This is because in Forex, we are dealing with the “lowest common denominator” of any country, which is the country’s currency. Hence, it is wise 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: USA and China.

In a report compiled by the United Nations in 2014, the rankings of the following countries by Gross Domestic Product (GDP) were as follows:

  • USA 5 trillion
  • China 3 trillion
  • Japan 4 trillion

 Countries GDP Ranking by United Nations in 2014

Countries GDP Ranking by United Nations in 2014

For the last two decades, the economic engine of the world has been dependent on the following model:

The Model of The World Economy Engine

The Previous Chimerica, The Model of The World Economy Engine

"Chimerica" was a termed coined in 2006 by Niall Ferguson, the author of the book "The Ascent of Money." It denotes the delicate relationship between 2 of the largest economies in the world.

Now, the above model worked on the fact that the U.S. purchases far more goods from China than China purchases from the U.S. In fact, at current standards, demand in the U.S. for Chinese goods outweighs demand for U.S. goods in China by nearly 500 percent.

This makes the U.S. the single largest buyer of the exports that drive growth in China. China in turn, invests surplus earnings from its exports of goods such as toys, clothing and steel primarily into Treasury Securities in the U.S. (e.g. 30-year bonds or 10-year notes).

The China and US Realation

The China and US Relation

This allows China to store its earnings in one of the largest and most liquid financial markets in the world, without needing to convert between currencies. Meanwhile, the recycling of surpluses into Treasury instruments helps to bankroll continued U.S. spending.

Essentially, over the past two decades, the U.S. and China have developed a special relationship based on the “safety” of U.S. debt. The U.S. gives China access to the wealthiest consumer market in the world, which in turn soaks up China’s massive output of consumer goods.

This not only provides income for Chinese exporters, but also helps ensure social stability in China by providing employment — which is Beijing’s primary economic policy goal.

All this is fine and dandy – up until now. With the onslaught of the global financial crisis of 2008-2009, the roles have markedly changed. Power has shifted.

This is how I perceive the next two decades to be:

The Current Chimerica, The Model of The World Economy Engine

The Current Chimerica, The Model of The World Economy Engine

This is a total role-reversal compared to the previous model. In fact, it is already happening.

The U.S. is now undergoing a period of intense de-leveraging. This basically means that the average American would be saving more than he would be spending.

Additionally, here's a few prime examples supporting the new model of "USA exports and saves, China imports and spends.”

1) China’s Demand For Commodities

On 2nd Jan 2010, Bloomberg reported that in 2009, commodities posted the BIGGEST annual gain in four decades, led by a doubling in copper, sugar and lead prices, as Chinese demand compensated for the longest slump in the global economy since World War II. China’s thirst for commodities and raw materials was, and still is, insatiable.

2) China’s Car Sales Surpass U.S.

On 10th Jan 2010, CNBC and Bloomberg reported that for the FIRST time in history, China's vehicle sales SURPASSED that of the U.S. for the year 2009! This feat underscores China's importance to the global auto industry as the world's biggest market. In 2009, a record 13.6 million units were sold in China, compared to sales of 10.4 million cars and light trucks in the United States.

3) China Decreases Its Holding Of U.S. Debt

 China’s investment in U.S. government securities dropped by $34.2 billion in December to $755.4 billion. The decline is the MOST in a decade. Japan’s holdings on the other hand, rose 1.5 percent to $768.8 billion, making it America’s largest creditor. What is interesting to note also, is that December marked the second STRAIGHT month that China became a net SELLER of U.S. debt.

So what does all this mean, ultimately? Especially to a Forex Trader? Here’s my thoughts:

1)    Wealth is coming to Asia. In fact, the next decade will record the largest wealth transfer to Asia in the history of the world. Asia is poised to be the centre of world-wide wealth.

2)    USD5.3 trillion is traded in the Forex market daily, making it one of the best platforms in the world today to create wealth.

Let’s put those 2 points together shall we? Wealth is coming to Asia; and we are on the platform of the LARGEST financial market in the world – FOREX.

All we have to do is to step firmly on this platform called FOREX, and the wave of wealth will sweep us all into financial prosperity if we will only recognise its immense power.

This is leverage in its highest, purest form.