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China Backs Off Currency Intervention

Early on in Treasury Secretary Timothy Geithner’s tenure, he piqued the attention of online forex traders when he suggested that China was manipulating the yuan. However, it now appears that Geithner has revised his previous attitude and no longer claims evidence of yuan manipulation. Those who follow online trading have wondered if this is merely political doublespeak or if, in fact, China has adopted more of a laissez-faire attitude towards its currency.

While there are quite possibly traces of the former at work, critical opinion points to the latter as the rate at which China increases its forex holdings declines and China, in trying to position itself as the new global economic superpower, allows the yuan to free float in the market. Moreover, China’s economic growth has slowed this year to 6.1%, which is the slowest growth rate on record in 10 years.

Bank of Japan: Economic Conditions Have Deteriorated Significantly

In mid March, the Bank of Japan (BOJ) released a bleak economic outlook for Japan, saying that conditions have deteriorated significantly and are likely to continue to deteriorate. Exports, business fixed investment, and corporate profits have decreased, while unemployment is on the rise. Consequently, the BOJ said, production declined at a much faster pace.

In spite of the grim news and the expectation that Japan’s economy will remain troubled in the short-term, the yen has continued to appreciate in forex trading. Around the same time as the BOJ announcement, the Fed’s announcement that it would take further steps to buy long-term treasuries and extend the size of lending programs caused the yen to post big gains against the USD, falling below the key 96.00 level. Since the global financial crisis became top priority last fall, the USD/JPY has almost become a guaranteed profitable short forex trade as the yen has appreciated due to investors unwinding their carry trades and its perceived safe-haven status.

China May Be First Major Economy to Recover

As China’s $585 billion stimulus package begins to take effect, the third-biggest economy is showing some signs of recovery. According to recent estimates, China’s economy could expand 6.6% in the second quarter after slowing to 6.3% in the three months to March 31, reports Bloomberg.

Like most other major economies, China has been battling high unemployment, flagging exports, and a slowed housing market, although it is one of only three large economies still growing. The stimulus, however, which has increased spending on roads, railways, housing, and loans, has acted as further riprap to shore up the Chinese economy. Lu Ting, a Merrill Lynch economist in Hong Kong, told Bloomberg, “China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008.”

Lu added that China has the resources that it needs to maintain growth even if the rest of the world takes longer to show the same signs of recovery. The country’s low public debt of only 18.5% of its GDP, $1.95 trillion in forex reserves, and balanced budget put it in a good position to weather the storm. Although the Chinese government recently faced criticism from Treasury Secretary Geithner over perceived manipulation of the yuan in currency trading, Lu maintained, “China has perhaps the deepest pockets in the world. It can relentlessly ramp up spending to create jobs and meet its growth target.”

Japan Has Not Intervened in FX

In line with other Asian authorities’ attitudes towards online forex trading, Japan has not intervened in the forex market to help the yen appreciate. In fact, Japanese monetary authorities have not ventured into the forex market since March 2004, when 30 trillion yen ($315.1 billion) was spent to stem the yen’s appreciation. As a result of the government’s reticence, the yen has not been able to regain the 13-year high against the USD that it hit earlier in October 2008.

Although Japan’s forex reserves topped the one-trillion mark in late November, the government may have been reluctant to shore up the yen due to deteriorating global economic conditions which caused Japanese exports to fall 35% in December and deflated earnings back home. Toyota, Sony, and Honda have all announced cutbacks and layoffs as well.

Japan’s Finance Minister, Shoichi Nakagawa, said that authorities should be prepared to deal with undesirable market volatility if needed. In late January 2009, Japan’s Vice Finance Minister for International Affairs Naoyuki Shinohara told reporters, “We are closely monitoring movements in the currency market” but declined to comment when asked if Japan would curb the yen in the future.  The government’s laissez-faire approach was reinforced when the Bank of Japan recently voted to keep the benchmark rate at 0.1%. 

China Develops $586 Billion Stimulus Plan

Trying to learn forex and follow world economies in the recent months has revealed a strong trend towards large-scale government rescue efforts. Yet another country has announced a stimulus plan to buttress its weak economy. In addition to Japan and South Korea, China is planning a $586 billion stimulus plan designed to boost consumer spending through tax cuts, construction projects, and aid to farmers and the poor. Stimulus talk has been heightened with reports of a 9% decrease in economic growth during the last quarter and a growing number of layoffs, especially in export industries. An additional stimulus may supplement the main package with spending on schools and health to offset the high cost of education and healthcare to Chinese families.

The stimulus plan is not the only measure being used to help the economy. In late November, the People’s Bank of China made a 108-basis-point cut to interest rates. Although the rate cut was expected by investors, the magnitude of the slashing—the largest since the Asian financial crisis of October 1997—caught most by surprise. However, it did help the yuan post a modest gain against the U.S. dollar in forex trading, as did further cuts in December. Most analysts anticipate the yuan floating between 6.80 and 6.90 against the dollar, though if export production suffers in the near future, it could weaken further. 

Asian Authorities Scale Back Forex Intervention

During October’s maelstrom of volatility in stock and online forex trading, Asian authorities spent billions of dollars to prop up their currencies, but now policy makers are beginning to favor some currency depreciation in order to remain competitive in the global market. The International Monetary Fund has forecast that in 2009, the economies of the U.S. Japan, the Euro zone, and Great Britain will shrink for the first time in half a century, lessening demand for Asian exports worldwide.

A currency strategist told The Economic Times that the currencies most likely to be hurt in coming months include the Singapore dollar, Taiwan dollar, Malaysian ringgit, and Thai baht, with these falling as much as 4% against the U.S. dollar by June 2009. The worst may have passed in currency trading for the hard-hit South Korean won and Indian rupee, but they remain vulnerable for now.

South Korea Also Announces Stimulus

Following Japan’s lead, South Korea, whose failing currency has been the subject of much forex news in the past few months, has announced a stimulus package equaling 14 trillion won, or about $11 billion. As South Korea, like so many countries around the world, becomes further entrenched in the global credit crisis, the economic outlook for next year has descended to gloomy levels, which most analysts projecting 2.5% to 3.5% growth for 2009 and the government offering an only slightly more optimistic 4% prediction.

According to the Ministry of Strategy and Finance, 11 billion of the stimulus will be allocated to new spending, including infrastructure-related projects, small business assistance, local government spending, and low-income household assistance. The government also plans about three trillion won in tax cuts and other incentives.

Thus far, however, the stimulus, along with a series of interest rate cuts, has been unable to stop the won’s losses in online trading. To date, the won has fallen 32.7%, making it one of the world’s worst performing currencies, according to the Associated Press.

Japan Announces Stimulus Package

In early September, we reported that the Japanese government was considering a billion-dollar stimulus package to ease citizen relief from high food and fuel prices, as well as keep the Japanese economy afloat. The stimulus package is now official, and at 27 trillion yen ($275 billion), it’s a significant move to help the world’s number two economy survive “a financial disaster,” as Prime Minister Taro Aso called the global financial crisis.

Included in the stimulus package’s provisions are extended credits for small businesses and cash paybacks to Japanese households. Although the Japanese economy is thought to be relatively stable in comparison to the U.S. and Europe, concerns about the nation’s health still linger. Industrial output has fallen for the third straight quarter, and the high yen value has proved detrimental for Japanese exporters, whose products have become too expensive for key importers in the U.S.

As the yen has appreciated in forex trade, the Nikkei has remained low, down 32% in 2008 and 24% in October alone. This is a combination which points to the tremulous condition of the financial market. “Foreign exchange markets remain very jittery. Once again, the strongest performers in the last 24 hours have been the dollar, Swiss franc and most of all, the yen,” ING forex strategist Tom Levinson told Reuters. “So it’s still very much a case of safe-haven, low-yielding currencies performing more strongly.”

China’s Forex Reserve Growth Slows

When you start to learn forex psychology, it becomes clear that the “glass half empty” school of ideology prevails. Although China’s forex reserves are the world’s largest at $1.9 trillion as of September 2008, the focus lately has been on the fact that the overall growth rate has slowed this year due to global economic weakness. In the first quarter of this year, growth was up nearly 40% but now stands at only 32.9% higher than the previous year. According to AFP, experts foresee the slowing to continue amid prolonged economic woes, the strengthening U.S. dollar, and government actions to curb speculative “hot” money inflows. In the past, “hot money” has been the third major contributor to the growing reserve behind trade surplus and inflows of foreign investments. However, the dollar’s strength as of late, limiting profit taking on the yuan, has most likely discouraged “hot money” and pared the reserve’s gains.

Won Falls, Then Gains on Government Support

In August, we reported that South Korea’s forex reserves had shrunk more than $10 billion to brush a 15-month low. One explanation for the drop off was that officials were selling off their holdings in hopes of stabilizing the won and steadying inflation. Recently, however, the won reached a four-year decline, making it one of the poorest-performing Asian currencies.