Can You Profit from Currency Market Chaos?

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Can You Profit from
Currency Market Chaos?

http://www.options-trading-education.com/24360/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.

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Before We Continue…

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.

Can You Profit from Currency Market Chaos?

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