For those that want to learn to trade on the forex, it’s been a while since we’ve taken a good Maven look at the forex markets, but the buzz this week among readers about the new FX Friday strategy, plus recent fun and games going on in the markets show just how exciting forex can be.
This week’s story begins in the East.
The fishing boat, the finance minister and the forex trader – if you want to learn the forex, events like these are worth knowing about
Japan and China are currently at loggerheads over a small fender-bender in the East China Sea.
On the 8 September, a Chinese fishing boat collided with two Japanese patrol boats near the Senkakus, a group of uninhabited islands that are claimed by both countries.
This little prang sparked off a chain of events, the tremors of which have been rattling currency markets around the globe.
First off, the Japanese throw the fishing vessel’s captain into jail for three weeks.
China demand an apology.
Japan fire back with a compensation claim for the damage done to their patrol boats.
China put a halt on exports of rare earth elements to Japan.
Rare earth elements (93% of which come from China) are the vital components to products like hybrid cars, solar panels, electronic gadgets – the lifeblood of the Japanese economy.
Storm in a teacup
You’ve probably guessed that there’s more afoot here than a fishing boat going off course.
As two major exporters to the West, China and Japan are locked in a bitter battle of currency devaluation.
China have been artificially holding back the value of the Yuan for years, much to the annoyance of the US and to other exporters (like Japan).
The Japanese are desperate to suppress the value of the Yen. As a nation that relies on exports, a relatively weak currency makes their products cheaper and more appealing to overseas purchasers.
However, the value of the Yen has been growing. Since June 2007, it has gained 50% against the dollar.
This kind of appreciation hits exporters where it hurts most.
Throwing money into the wind
So, the Bank of Japan decided, about two weeks ago, to intervene, buying around $24 billion of the greenback in a bid to boost the value of the dollar against the Yen.
The effect was marked and immediate the value of the dollar jumped against the Yen.
However, two weeks later, we’re back trading at the same levels we saw on the 14th September, before the intervention.
It seems that they might as well have tipped their $24 billion worth of Yen off the side of a fishing boat into the East China Sea.
Currency interventions have a long history of failure.
Earlier this year, Switzerland threw $75 billion at the problem. They, like Japan were suffering the consequences of their relative strength compared to their trading partners.
But the Swiss efforts, much like the Japanese ones, were an exercise in futility as despite spending 20% of their GDP on euros, their currency hit an all-time high against the euro.
Of course, the Japanese and the Swiss aren’t the only ones throwing money into protecting their currency – it’s estimated that Russia spend $210 billion last year in a failed attempt to keep the rouble competitive.
So, the fact that China have been holding back the value of their currency – with considerable success – for years is beginning to cause considerable annoyance.
And pleas from Premier Wen Jiabao that a 20 per cent rise in the Yuan would threaten China’s social order – “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs” – are falling on deaf ears in Washington.
This year, China have slowed down their purchases of US assets, in search of diversification. And where have they turned to?
That’s right Japan. China bough 583 billion JPY worth of Japanese financial assets in July alone.
It’s little wonder that Japan is feeling a bit sensitive.
Too much information
The melodramas of the forex markets can be hard to keep up with.
Luckily for forex traders, however, we don’t have to keep on top of every twist and turn although it can be exciting to watch the stories play out.
What matters to us is that these market these are the things that bring us profit opportunities.
If you’re interested in dipping your toes in the forex markets, the system I recommended earlier this week looks like a good starting point – it won’t take up much of your time, or too much of your capital – and you definitely don’t need a degree in economics!