Forex traders are usually divided along the lines of technical and fundamental analysis, and some mix. However, it’s important to note the flows in the markets, especially as they change.
The global slowdown has its effect on currencies, via large countries whose currencies aren’t traded widely.
- China: The world’s No. 2 economy is still growing at a fast pace, especially in comparison to the sluggish West. However, it is experiencing a slowdown that is probably stronger than the official numbers suggest. Chinese authorities have a tendency to smooth numbers: lower growth figures in good times and raise them in bad times. The recent rate cut indicates that things aren’t that good there. Also electricity usage and the divergence between the official manufacturing PMI that still shows growth and the unofficial one that shows contraction is worrying. On this background, China is probably moving to the US dollar and away from other currencies that it diversified into earlier.
- Oil producing Arab nations: When oil prices are higher, the extra oil revenue (denominated in dollars) is diversified into other currencies, such as the euro. The recent dive in oil prices means less Middle Eastern dollars are converted into other currencies.
On the other side, we have India: the huge country is experiencing a slowdown as well, and this heavily impact the Indian rupee, which fell against the dollar. A rising external debt and a weaker currency used for imports (of oil alongside other goods) is becoming less favorable for India now. They could sell dollars in an effort to strengthen the rupee.
However, the impact of China and oil producing Arab nations is much stronger than India’s at the moment.
Unless global growth picks up soon and oil prices rise, we could see this change in flows having an impact on currencies.
This article is part of the Forex Monthly Outlook. You can download it by joining the newsletter in the form below, which appears on any article on Forex Crunch.
Share
