Weak dragons? The fear and facts behind China’s currency war

Weak dragons? The fear and facts behind China’s currency war

Is the world in the grip of a potential currency war? US President Donald Trump has repeatedly charged several countries with currency manipulation — intentionally devaluing their currencies to gain a competitive advantage. Trump accusations include both the EU and Russia, but his number one target is China.

Has Beijing really been "weaponising" the renminbi through artificial devaluation to covertly attack the US? We explore the truth behind Trump’s allegations, and how traders can take advantage of real, or imagined, currency wars.

china
Trump has made repeated accusations of currency manipulation. Is he right?

 

Is Chinese currency manipulation fact or fiction?

A weak currency results in cheaper exported goods and services. This stimulates a country's trade balance and gives the country a bigger market share in the global export industry and a competitive advantage over its trade partners. Currency manipulation directly contravenes the International Monetary Fund (IMF)’s trade agreements and would also render any US tariffs effectively useless.

The CNH, which refers to the renminbi in the offshore market, has seen tremendous depreciation relative to the USD. This is mainly due to the gap between US and Chinese interest rates and the impact of American tariffs on Chinese exports. What is not evident, despite a steady stream of accusations and attention-grabbing headlines, is definitive proof of Chinese manipulation.

In July 2018, IMF Chief Economist Maury Obstfeld commented that “there is no evidence” of intentional depreciation by Beijing. This stance is supported by the US Treasury’s biannual report on international exchange rates, which declined to name China as a currency manipulator. The People’s Bank of China has also gone on record as saying they will attempt to keep the renminbi stable.

Despite the absence of proof, the sheer volume of persistent rumours is having a debilitating effect on the global economy. The steady, repetitive message that China is intentionally devaluing the renminbi is driving volatility and uncertainty in the markets.

Weaker currencies offer the opportunity to go long on the USD. Sign up for a free account with Exness and open a trade today.

What’s the trading strategy in a currency war?

Due to the speculative nature of currency wars, price movements are likely to be stronger and faster. An investor who correctly forecasts a trend can potentially seize big opportunities.

For example, the charts below show a strong bullish momentum for the USD against the JPY since the beginning of 2018. Traders who predicted this trend and went long on the US dollar against the Japanese yen — and the majority of Asian currencies — would have made huge profits.

usdjpy
A strong dollar is a trend that just will not go away this year

 

Set a stop loss to stay in the trade

Increased volatility leads to more price fluctuations and “whipsaws” — where the price will shoot up and down quickly. A trader could adopt a wider stop loss to avoid getting stopped out of the trade by the price whipsawing.  

Trading under volatile market conditions means you have to manage your risk. Find out how to set a trading strategy around a volatile news source: Donald Trump's Twitter. 

 

Watch the right currencies, predict the range

In a currency war, any country that is export-driven is going to be affected. We recommend you watch the following currencies closely for trading opportunities:  

  • USDJPY
  • USDCNH
  • USDKRW
  • EURUSD
  • USDSGD
  • USDIDR

In uncertain environments, the market tends to be more range bound. This means the price is moving up and down within a relatively tight range for a certain period of time. A trader could buy at the support, the bottom of the price range, and sell near the resistance, which is what the top of the range is called.

The key idea is to play the fluctuations and volatility of a currency war, or the rumours of a currency war. Traders can predict the price movement and place pending orders at key support and resistance levels in order to play the reversals.

 

Use the Bollinger Band

A good indicator to look at when trading on the above currencies is the Bollinger Band, a technical indicator that measures whether prices are high or low in relation to market volatility. As the graph below demonstrates, when the price hits the upper and lower bands, there is a good chance the price would next make a reversal to the mean (the middle line). As an indicator, the Bollinger Band enables you to test your assumptions on the price's movement and take a position accordingly.

BollingerBands
In a range market, the Bollinger Band can enable you to identify when the price keeps coming back to the mean

 

Whether you're a range trader or a day trader, Exness has the account and conditions for you. Sign up for a free account with Exness start trading today.