Over the course of The Great Recession as the developed world fell into a slump, the economies of emerging market nations such as China and India continued to grow. Along with that emerging economies growth, the influence of the currencies of these nations have increased in the fundamental analysis required for buying and selling on the foreign exchange markets, too. In today’s foreign currency market, China, like the United States, is one of a few select nations that can move the financial markets by its actions, or inactions.
This primarily results from the more than $3 trillion in foreign reserves held by the People’s Republic of China. Unlike the balance sheets of the central banks of Japan, Great Britain, and the United States, China’s central bank assets are a result of export earnings, not acquisitions of its government bonds that no other investors would buy at the prevailing interest rates. With such a massive amount of hard currencies that grows larger each month due to China’s international trade surplus, the People’s Republic has a tremendous impact on all financial markets, particularly foreign exchange.
Even as growth has declined for emerging economies, the impact of these currencies continues to increase. While it is not registering the double digit economic growth it had from the last decade, China has entered into agreements with a number of nations and exchanges to utilize the Yuan in a reserve currency role. The significance of that cannot be understated in the long term fundamental analysis of China’s currency.
Eventually, that will result in the Yuan replacing the US Dollar as a medium of exchange in a multitude of transactions. While that will not be happening anytime soon, it is inevitable due to the sheer size of the Chinese economy. In purchasing power, the People’s Republic is already the world’s biggest market.
For specific commodities it is even more pronounced. China is the world’s largest consumer of coal and copper, for example. It is inevitable that more and more of the transactions will be settled in Yuan, not The Greenback.
Following China, the currencies of other emerging market nations will dominate localized transactions. With one-sixth of the world’s population, India is one of the global emerging economies that is having a larger impact on the fundamental analysis of the foreign exchange markets. Like China, India is a major consumer of commodities, too.
Combined, China and India represent almost 40% of the world’s population, which necessitates that all fundamental analysis in forex markets account for these nations.
When it was offering high interest rates as part of an anti-inflation campaign in Brazil, the Real was utilized widely in the carry trade. Previously, that had been the province of the Japanese Yen. But the growth of emerging economies now has the currency units as substitutes for others.
That already is in the fundamental analysis for forex transactions, as evinced by Real’s role the carry trade. The development of emerging economies has resulted in currency markets that have the depth to handle carry trades and serve in a reserve capacity, among other functions not before possible. These roles will only increase in size and scope in the foreign exchange markets for the future.