As the Chinese manufacturing sector is slowing down, traders are asking how a new trend with a softening yuan will play out in the forex market over the next few months. With USD facing post-election chaos, another currency might be a better choice. So which pair could generate better gains for Exness traders? In this article, we look at why China is struggling, and how traders can use this current lull to target significant gains from a less-known currency pair.
When China’s manufacturing Purchasing Managers Index (PMI) came out at 50.2 for October, many analysts said that the long-expected slowdown in the Chinese economy had now manifested itself more seriously than seen before. They also said that we need to be prepared for even lower numbers to come, as the trade war between China and the US continues unresolved.
Although a PMI reading above 50 still indicates slightly expanding activity in the manufacturing sector, experts worry about the downward trend in the figures, as they appear to be headed below 50, which indicates “contraction” territory.
That marks the weakest growth seen since Q1 of 2009–in other words, a nine-year low!
With these figures as a backdrop, the question now is how traders can take advantage of the situation and avoid getting caught up on the wrong side of emerging market-oriented currencies and assets.
Trading the Chinese lull
Although few traders are active in the market for offshore Chinese yuan (CNH), the trade war also impacts other Asian currencies both directly and indirectly.
Despite what some people think, however, the Hong Kong dollar (HKD) is not really a viable alternative for trading the fundamental drivers of the Chinese economy. In fact, the HKD is pegged to the US dollar and therefore does not offer any real exposure to the Chinese growth story (or lack thereof). Instead, the Singapore dollar (SGD), for example, is one currency that is highly sensitive to everything that goes on in China, in addition to being very liquid and tradable.
As a regional Asian hub for the trading and transportation of goods, Singapore is heavily reliant on global trade, and in particular the flow of goods to and from China. When this flow slows, Singapore is one of the first countries to suffer the consequences.
Despite these fundamental links, it is important to be aware that both the Chinese yuan and the Singapore dollar are managed currencies. This means that although they are allowed to float freely to some extent, the central banks in both countries can and will intervene in the markets if they deem the price of their currency to be either too high or too low.
Comparing the Chinese yuan and the Singapore dollar against the US dollar, it’s clear that both of these currencies track each other closely. The one notable difference between them is that the Singapore dollar generally sees much smoother price action, while fluctuations in the yuan are sharper.
Chinese manufacturing on the move
Another major driver at play here is the shift from manufacturing to services and consumption that the Chinese economy is currently going through. As if the trade war was not enough, this shift is also a difficult transition for China to go through. And when China lowers its dependence on manufacturing, factories move elsewhere.
There’s been a lot of talk about manufacturing businesses “reshoring” to the US lately. This is doubtful, at best. Most evidence still points to the fact that the US is an expensive place to run a manufacturing business. However, there are signs that companies are increasingly moving into South East Asia to maintain their competitiveness.
According to some well-informed sources, parts of the Chinese manufacturing sector is certainly on the move to countries in South East Asia, often referred to as the ASEAN region. Bangladesh is one country that has already enjoyed the benefits of this, with a huge influx of Chinese textile factories a few years ago. Other examples include Vietnam and Indonesia, which are both experiencing rapid growth in their economies.
The problem from a trader’s perspective, however, is that these countries’ currencies are not particularly popular in the retail forex market. In other words, the Singapore dollar (SGD) is probably our best shot again.
Exness traders get instant access to trade the Singapore dollar (SGD). With America’s post-election chaos looming, now might not be the time for USD. Since Singapore’s economy has a direct link to the Chinese economy, the safer option might be stick to swiss stability and go long on CHFSGD. One thing is for sure, Exness traders following the Economic Calendar will have a heads-up on the coming volatility of the last quarter of the year. Sign up with Exness and use the MT4 WebTerminal to see the opportunities arise in real time.