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China may be heading into an economic crisis. Is it time to short the Yuan against major Forex currencies? If it is time to short the Yuan, which currency should one trade against? If the Chinese economy tanks Australia will be hit as it exports a lot of raw material to China. Japan is a major trading partner of China. Will the Yen devalue further if the Yuan falls? Is Canada and the CAD safe? How about the US dollar if the Chinese currency falls due to a debt crisis and falling exports or, even worse, a political crisis?
Forex Factors and How they Affect the Yuan
Fundamental analysis of Forex pairs requires good fundamental analysis followed by up to the minute technical analysis. The value of a currency depends on politics, monetary policy, balance of trade, currency reserves and economic stability. Shorter term, technical analysis of market sentiment hinges on pronouncements and actions of central banks and technical trading factors. While technical analysis can give traders an advantage in short term trading, the fundamentals are what drive currency prices over the long term. How to trade Forex successfully is typically to use fundamental analysis of Forex pairs to gain a sense of the market possibility and technical analysis to spot short term opportunity. With these caveats in mind, what drives the Yuan today?
Real Estate Bubble
China is overbuilt. At lease on the high end there are way too many big projects that are sitting empty. At the same time many smaller projects that could benefit the community are not happening. Capital that went into mega construction projects is not making money and at some point foreign investment will back off. If the real estate bubble in China collapses it may well bring the value of the Yuan down with it.
Transparency has never been of China’s strong points. Hidden debt and unaccounted debt threaten to bring down the Chinese economic system. The situation is reminiscent of Japan twenty years ago when the Japanese economy was riding high and Japanese investors were buying Rockefeller Center and the Pebble Beach golf course. Handshake loans that had been hidden from public view helped bring down the Japanese economy which proceeded to flat line for the next two decades. A debt crisis would be a good reason to short the Yuan.