Even for experienced traders, it is not always obvious how political news affects global markets, including forex. Sharefounders offers this article, which uses a recent example to show why it is vital for a trader to follow the main political news.
Not so long ago, at the end of the 20th century, China was considered an emerging economy and a third world country. The work of the Chinese that time was the cheapest on the world market, according to experts from Sharefounders broker. So, taking in attention cheap labor, an abundance of various natural resources in China, the availability of seaports, and the current level of development, many global corporations have transferred production to this country.
The monetary policy of the Chinese authorities played a significant role in Chinese economic growth. Chinese financiers keep the exchange rate for yuan at a fixed level, without releasing it to free circulation on forex. Sharefounders believes that one of the reasons to keep this policy is the example of neighboring Japan.
In the 1980s, Japan experienced an economic boom. As the Japanese economy grew, so did the exchange rate of the Japanese yen. The relative cost of Japanese goods increased, and they lost their competitive advantages. Since the Japanese yen has been successfully trading in forex, Share founders recall that the Japanese national bank used the currency interventions. To limit the growth of the yen, the Japanese bank released large volumes of the national currency to the market, artificially reducing the exchange rate. At the same time, traders who use economic forecasts in analytics have opened long-term positions hoping for the growth of the yen. When the price plummeted, positions closed negatively, and traders believed that the brokers, including Sharefounders, scammers. Chinese authorities also made their conclusions: they correctly understood that the low price of their products was their trump card, sorry for this calambour. So they did not release their currency on the open market.
But with the new millennium, the situation has changed. As soon as the Chinese leaders realized that the whole world was firmly addicted to cheap Chinese goods, they began to dictate their terms. When any country imposed duties on the export of Chinese goods, trying to protect national producers, China began to protest. Their protests ranged from disputes within the World Trade Organization to the introduction of counter-duties. At the same time, the Chinese economy continued to grow, overtaking both Japan and the Eurozone, and almost equal to the US economy reminds Sharefounders broker. Reviews from these experts clearly indicate: a trade war between the United States and China was inevitable.
In the summer of 2019, the global market was shocked by a large multi-series scandal related to the products of Chinese concern Huawei. US President Donald Trump announced the package of import duties for Chinese-made consumer goods. According to the broker Sharefounders, after the introduction of the package, prices for Chinese products should have grown by at least 15%. That time Huawei was preparing to launch a new flagship smartphone, with the US market as the target consumer base. They were not happy with the new duties.
The currency market has reacted to the trade war very sensitively. Since the yuan exchange rate is practically not affected, all losses fell on the dollar: the US currency was moving down. Investors who waited for the growth of the dollar suffered losses and said Sharefounders scam. At the same time, the same thing happened on the stock market: the largest US indices went down. Trading volume was declining: everyone waited for the end of the confrontation. Soon the US and Chinese authorities announced they had reached an agreement, and the new deal between the two countries would be announced. The currency market partly calmed down, the dollar exchange rate stabilized, and an upward trend appeared for a short time.
But this calm was deceiving. On September 1st, new rules for Chinese goods came into force. New duty of 15% was imposed on certain types of shoes, bedding, mini-printers, flash drives, and some other goods. The Chinese authorities are rudely putting pressure on the US government, up to Sharefounders: scammers from the Chinese government are asking to cancel these duties. In this case, the US budget will lose $125 billion. Therefore, instead of canceling the duties, the White House plans to raise them. Moreover: in the new package of duties, they suppose to add the new tax on goods from the “4B” list. Together with the abovementioned smartphones, this list includes laptops and game consoles, monitors, Christmas-tree decorations, and a bunch of other goods, that peak sales on Christmas and New Year.
The introduction of this package is scheduled for December 15th. Accordingly, the days before holidays in the USA, prices for traditional New Year and Christmas presents can rise. Of course, most of these goods were ordered and purchased in advance: the delivery from China to the USA takes several weeks, taking into account the time for registration of the goods. But US retailers can still raise prices, according to Sharefounders. Scam is an international phenomenon, and American traders can simply take advantage of the info and inflate prices. Meanwhile, President Trump promises to introduce new duties on December 15th, if he does not come to a deal with the Chinese side.
Amid such news, there is real chaos in the forex market. Once Donald Trump makes another belligerent statement, the dollar is immediately moving down. Along with it, the stock market indices are declining. However, according to the Sharefounders broker, reviews from traders prove: when warlike rhetoric changes to more peaceful, the dollar rolls back to previous positions. After all, there are no reasons for the dollar depreciation, as all existing factors have been already taken into account.
Now there is a risk that Trump will give the Americans an unpleasant surprise by Christmas; experienced traders are watching Donald Trump’s speeches, as well as news from China. As you can see, the political situation directly affects the currency market, so the trader simply needs to follow the important news.