Trades, Reserves, and FX trends
Thinking of buying into some worth while investments? How about buying into currencies at low rates and selling high? Look at the China economy for a moment before you train your eyes elsewhere.
China, Asia's "sick man" and "sleeping giant" decades ago, is today's foreign exchange reserves giant - fully awake at that! Its FX reserves is the world's largest today, already more than $1.2 trillion as of March this year.
Before placing bets in other currencies or stock markets, it pays well to consider the foreign reserves available locally. Foreign reserves are a by product of trade growth.
China's trade growth is continuing to beat all others, with exports in 2006 exceeding those of the US for the first. China's exports last year were the third largest in the world. Germany was number one.
China's reserves, already up by 37.4 percent a year before, were up from start of 2007 by 12.7 percent, says a People's Bank of China report in its website.
Look at why China has bulging foreign reserves. Its trade surplus stood at $46.6 billion in the first three months alone. Another cause for the bloated reserves is its foreign direct investments which was $15.9 billion.
With these developments, we see the relevance of a strong economy to the strength of a currency. One factor of a strong economy is the abundance of its foreign exchange reserves. With such, the currency begins to have stronger buying power.
Trade deficits also must be taken into account. Trade deficits tend to weaken the currency, although some measures can ward it off, like an upbeat local investment, and make the currency and economy still look good.
The US, for instance, had a recent huge trade deficit, worsened by some unemployment problems. This was saved by some so-called price adjustments to up its exports more than its imports, and by a bullish confidence by its local investors, especially in real estate.
Japan, on the other hand, is suffering a serious yen fall. It is thinking up some trade and banking rehabilitation to make the yen recover. So while they are at it, investors may want to borrow from the Japanese yen or American dollar and trade in Germany or China.
Money players have better think globally as they act locally. The constant reminder is that economies can always alter or shift on short notice.
Trade trends, foreign reserves, foreign direct investors' confidence, and policy changes of major financial institutions - these are vital considerations to weigh before going out and placing bets in currencies.