Month: November 2012

Our old friend Marc Faber was on CNBC earlier this week. He said we should “prepare for a massive market meltdown.”

I don’t think markets are going down because of Greece, I don’t think markets are going down because of the “fiscal cliff” – because there won’t be a “fiscal cliff.” The market is going down because corporate profits will begin to disappoint, the global economy will hardly grow next year or even contract, and that is the reason why stocks, from the highs of September of 1,470 on the S&P, will drop at least 20%, in my view.

Of course, Marc has been preparing for a major market meltdown for years. And so have we. So, when we repeat our predictions, we begin to sound foolish.

And the longer the market goes without melting down the more foolish we look… until the market actually does melt down. We gloom-and-doomers are always wrong — and then, we’re right.

The Dow gave up another 185 points yesterday…

Blowing Bubbles

In the 1990s, investors pooh-poohed our warnings about falling stock prices. Then the Nasdaq and the dot-coms led the stock market. Some of these stocks had gone up to crazy levels.

This can’t go on,” we said, stating the obvious. Still, many investors didn’t want to hear it. They were counting on the stock market to make them rich. All they needed was “another Microsoft.” Or “another Amazon.”

The dot-com boom turned into a bubble. Then it blew up. Investors were downcast. Their hopes for easy money were dashed.

But the feds came to the rescue. After a slump in 2001, an aggressive combination of fiscal and monetary stimulus soon had the party going again.

This time, hopes for easy money were focused on housing. If you had a pulse, you could get a low-doc mortgage for more than 100% of the buying price.

Heck, you didn’t even need a pulse! The robo-mortgage processors didn’t care if you were living or dead. They wrote up the mortgage papers, gave you money and gave themselves a big bonus.

Then some slicer-and-dicer packaged your mortgage into a mortgage-backed security (MBS) and sold it to speculators. Those MBSs are what the Fed is buying now… to try to revive the housing market.

Housing had gone to dizzying levels by 2007. Again, we doom-and-gloomers worried that it was a bubble. And again, the dreamers and schemers sloughed off our warnings. But the housing market blew up in 2007… and has been losing air ever since. Bummer!

Once again the get-rich-quick crowd is deeply disappointed. Where will it turn for easy profits? Back to stocks!

The Next Big Thing

Following the crash of 2008, stocks went up 100%… retracing the entire move down. This caused investors to think the easy money was back on the table. Many thought they could just buy “stocks for the long run” (which they figured was about five years) and get rich.

If they were lucky, they caught the big run-up after March 2009. And now they’re waiting for the next burst. Where’s the “next Apple?” The “next Google?” The next big thing?

Darned if we know. But we know what happens to corporate earnings after they hit a major new high. They go down. And we know what happens to stock markets. They go down too. This is not a problem the feds can fix. It is just a fact of life. You don’t fix it; you prepare for it.

Poor Prospects?

Faber is looking at major companies – Apple, Google, Intel, McDonald’s. They seem to be headed down.

Why? Because earnings aren’t as good as they once were. And prospects don’t look so good either.

For the first time ever, for example, McDonald’s reports lower same-store sales. And Apple? How much better could it get?

Smart investors are asking themselves questions…

Why pay 15 times earnings for stocks in an economy that is growing at only 2% per year?

How can the Fed continue to print money without eventually causing inflation rates to increase? How long can the federal government continue to borrow and spend without going broke?

For companies to make money they need people who can buy their products. But household incomes and household wealth have gone down in the U.S.

They’re lower now than they were 20 years ago. Now the average starting salary is only $23,711. And nearly 40% of Americans make only half of their peak earnings. How are these people going to buy more products and services?

To make matters worse, the native-born U.S. population is now in decline. And a large part of it is getting old. More than 12,000 people turn 55 every day. At that age, their spending patterns change. They spend less.

As for the meltdown, Faber figures:

There will be pain and there will be very substantial pain. The question is do we take less pain now through austerity or risk a complete collapse of society in five to 10 years’ time? I think the whole global financial system will have to be reset and it won’t be reset by central bankers but by imploding markets – either the currency [markets, debt market or stock markets. It will happen – it will happen one day and then we’ll be lucky if we still have 50% of the asset values that we have today.

Disclaimer

By The Sizemore Letter

Listen to Charles discuss the fiscal cliff, the “triple dip” recession in Europe, infrastructure investment and more with Mike Robertson on Straight Talk Money.

If you cannot view the embedded audio player, please follow this link: Charles Sizemore on Straight Talk Radio

The post Charles Sizemore on Straight Talk Money Radio: All About the Fiscal Cliff appeared first on Sizemore Insights.

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Trading with Elliott wave analysis
November 16, 2012

By Elliott Wave International

(Part 1 of this article is posted here.)

A Quick Road Map of Wave Analysis

For this overview of wave analysis, I have borrowed from the “Cliffs Notes” version that we provide for free to anyone interested in learning about wave analysis. It’s called Discovering How To Use the Elliott Wave Principle.

Elliott’s road map, or basic wave pattern, consists of “impulsive waves” and “corrective waves.” An impulsive wave is composed of five subwaves and moves in the same direction as the larger trend — or the wave’s next larger size. A corrective wave is divided into three subwaves, and it moves against the trend of the next larger degree. As you can see in Figure 1, there are plenty of right and left turns — or up and down moves on a price chart.

Figure 1 reveals the general roadmap that markets follow during bull markets. Notice the building-block process. The completion of an initial impulsive wave (waves 1-5, up-down-up-down-up) sets the stage for a corrective phase (waves A-B-C, down-up-down). Combined, those waves represent the first two legs of a larger “degree” advance. In this illustration, waves 1, 2, 3, 4 and 5 together complete a larger impulsive wave, labeled as wave (1).

A five-wave rally from a significant low tells us that the movement at the next larger degree of trend is also upward. It also warns us to expect a three-wave correction — in this case, a downtrend. That correction, wave (2), is followed by waves (3), (4) and (5) to complete an impulsive sequence of the next larger degree. At that point, again, a three-wave correction of the same degree occurs.

Note that, regardless of the size of the wave, each impulsive wave peak leads to the same result — a correction.

If we isolate the corrective waves, the subwaves A and C move in the direction of the larger trend and usually unfold in an impulsive manner. Referring to Figure 1, the (A)-(B)-(C) decline that follows the (1)-to-(5) sequence illustrates this structure. Waves labeled with a B, however, are corrective waves; they move opposite to the trend of the next larger degree. In this case, they move upward against the downtrend. Notice that these corrective waves are themselves made up of three subwaves.

Reading the Wave Analysis Map

So now that you have a wave road map in hand, let’s talk about how to apply it to the actual terrain of financial markets. When I look at a price chart for the first time, my first task is to identify any completed five-wave and three-wave structures. Once I do that, then I can interpret where the market is along the pre-defined path and, from there, where it’s likely to go.

Say we’re studying a market that has reached the point shown in Figure 2. So far we’ve seen a five-wave move up, followed by a three-wave move down.

But this is not the only possible interpretation. It’s sort of like having a GPS that tells you that you’ve arrived, when you’ve actually got miles to go. In this example, it is also possible that wave (2) hasn’t ended yet; it could develop into a more complex three-wave structure before wave (3) gets under way. Another possibility is that the waves labeled (1) and (2) are actually waves (A) and (B) of a developing three-wave upward correction within a larger impulsive downtrend, as shown in the “Alternate” interpretation at the bottom of the chart. According to each of these interpretations, though, the next imminent movement is likely to be upward. That tells you more than most technical analysis systems do.

Alternate counts are an essential part of using the Wave Principle. They are neither “bad” nor “rejected” wave interpretations. Rather, they are valid interpretations that are given a lower probability while the count works itself out. If the market doesn’t follow the original preferred scenario, the top alternate usually becomes the preferred count.

I consider alternate counts to be similar to detours — just a different way for the market to get to where it’s going. How many times do you actually go from point A to point B non-stop in your travels? Admit it, you have to stop to grab a bite to eat or ask for directions once you realize you’re lost. After consulting the map, you get back on track toward your intended destination. The new path represents an alternate count.

This seeming ambiguity about a wave structure illustrates an important point about the Wave Principle that, in my opinion, is often misunderstood. The Wave Principle does not provide certainty about any one market outcome. Instead, it gives you an objective means of determining the probability of a future direction for the market. At any time, two or more valid wave interpretations usually exist. Unlike actual physical roads that exist, price movements in financial markets are always changing, and the best you can do is be somewhat confident of whether they are moving up or down. That’s the kind of confidence that the Wave Principle provides.

(Come back soon for part 3 of this series.)

Who is Jim Martens?
Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI’s Currency Specialty Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.

Catch up on Jim’s latest thoughts about FX markets and the business of trading them at his Twitter feed.

Download Your Free 14-page eBook: “Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success” Here’s some of what you’ll learn: Which Elliott waves to trade Which Elliott waves set up your forex trade When your analysis is wrong Guidelines for projecting price targets How to evaluate an Elliott wave structure How to use the bigger picture to give you perspective on the market’s next major move Jim also takes you through two real-world trading examples to reinforce what you’ve learned and apply it to your own trading. All you need is a free Club EWI profile to download this FREE 14-page eBook now >>

By The Sizemore Letter

It’s filing season again, that time of year when we get to peek at what big, high-profile investors are buying.  And perhaps no portfolio is waited for in more anticipation that Warren Buffett’s Berkshire Hathaway (NYSE:$BRK-A).

Buffett is still bullish these days, even with all the talk of the fiscal cliff.  If we fell over the cliff and the economy got whacked with higher taxes and massive spending cuts, Congress and the White House would hash out a deal before the economy slipped into recession.  “We’re not going to permanently cripple ourselves,” he said recently in a CNN interview.

That may be true, but I’m a little more worried than Mr. Buffett.  I agree that a deal will get made eventually, but the psychological damage can still be huge.  And we could easily get a deep stock correction or a recession in the meantime.  Policy paralysis has consequences.

With that said, what is Buffett and his team buying and selling these days?

To start, he’s buying broadcast TV.  Berkshire Hathaway bought nearly 20% of Media General  (NYSE: $MEG).  This is a small holding for a portfolio of Berkshire’s size, but it does show bullishness on the part of Buffett for traditional media.

I like to think I am a contrarian investor.  But then I look at Warren Buffett and I realize that I’m not nearly as big of a contrarian as I thought.  I wouldn’t touch traditional media right now because I can’t see where the profits will come from.  Advertising is an industry in flux, and TV competes with the internet for eyeballs.

But then, there is a proper price for everything, and Buffett seems to believe that, at .16 times sales, Media general is simply too cheap to ignore.

Buffett additionally made three additions in the gritty industrial sphere, buying nearly 4 million shares of Deere & Co (NYSE:$DE), the producer of tractors and others heavy-duty equipment,  1.2 million shares of Precision Castparts Corp (NYSE:$PCP), which is essentially a metal shop with a worldwide presence,  and 1.5 million shares of Wabco Holdings Inc (NYSE: $WBC), a world leader brake and control systems for large commercial vehicles.

Truck parts and tractors.  Buffett clearly believes that industrial activity will be picking up in the years ahead, both in the United States and overseas.

Now, what’s Buffett and his team selling?

He sold out of Dollar General (NYSE:$DG), Moldelez International (Nasdaq:$MDLZ), Ingersoll-Rand PLC (NYSE:$IR) and CVS Corp (NYSE: $CVS).

The sales have little obvious in common, other than all but Ingersoll-Rand have a strong consumer focus.  Dollar General is a discount retailer of assorted sundries, CVS Corp is national chain of pharmacies, and Mondelez is a producer of packaged foods.   Yet Berkshire still maintains enormous positions in Coca-Cola (NYSE:$KO), Procter & Gamble (NYSE:$PG) and Wal-Mart (NYSE:$WMT), so  you can’t reach the conclusion that Buffett is bearish on the consumer.

Still, Berkshire’s portfolio has been consistently drifting away from consumer-oriented stocks for months and towards grittier industrial stocks and business services stocks such as IBM (NYSE:$IBM).

Disclosures: Sizemore Capital is long PG and WMT.  SUBSCRIBE to Sizemore Insights via e-mail today.

The post What is Warren Buffett Buying? appeared first on Sizemore Insights.

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London Gold Market Report
from Ben Traynor
BullionVault
Friday 16 November 2012, 07:45 EST

WHOLESALE gold bullion prices fell below $1710 an ounce Friday morning in London, dropping below that level for the second day in a row, as stocks, commodities and the Euro all fell and US Treasuries gained ahead of negotiations among US lawmakers about the so-called fiscal cliff.

“Gold is being seen increasingly as a source of cash,” says Simon Weeks, head of precious metals at bullion bank Scotia Mocatta.

“Liquidation of gold can cover losses elsewhere.”

Silver bullion meantime fell to $32.19 an ounce.

On the currency markets, the US Dollar Index, which measures the Dollar’s strength against other major currencies, touched a 10-week high as the Euro’s recent rally stalled.

Heading into the weekend, gold bullion looked set for a 1.2% weekly loss by Friday lunchtime in London, while silver was down 1.3%.

President Obama is due to meet congressional leaders later today for negotiations on the so-called fiscal cliff due at the start of next year. Tax cuts made by former president George W Bush are due to expire on December 31, while spending cuts for the military and social programs are currently scheduled for January as a result of a deficit deal agreed last year.

Lawmakers are negotiating on how to reduce the federal deficit over the next deficit; failure to agree a deal would see the tax cut expiries and spending cuts occur as scheduled.

“[Obama] will not sign, under any circumstances, an extension of tax cuts for the top 2% of American earners,” White House spokesman Jay Carney said Thursday, a day after President Obama suggested taxes should be raised for the wealthy to reduce the deficit.

“What we won’t do is raise tax rates,” countered Republican Senate leader Mitch McConnell, who will be at today’s talks.

Ratings agency Standard & Poor’s stripped the US of its AAA credit rating in August 2011, after weeks of negotiations on raising the so-called ‘debt ceiling’ for federal debt.

“The [US credit] rating is in the hands of policymakers,” says John Chambers, chairman of S&P’s sovereign rating committee.

“If no budget deal is reached in the early part of next year and the debt trajectory just continues to rise,” adds Bart Oosterveld at fellow ratings agency Moody’s, “then we’d be looking at a downgrade of a notch to Aa1.”

Aa1 is the second-highest Moody’s rating after Aaa.

“If we don’t see an agreement and there is a gridlock, it will burden the Dollar and benefit gold,” reckons Dominic Schnider at UBS Wealth Management.

The UK government is unlikely to end its ownership of Royal Bank of Scotland and Lloyds “any time soon”, according to a report published by parliament’s Public Accounts Committee.

“The £66 billion cash spent purchasing shares in RBS and Lloyds may never be recovered,” the report on the sale of Northern Rock says.

“The low level of competition [to buy Northern Rock assets] does not give us confidence that the taxpayer will make a profit on the sale of RBS or Lloyds… it seems inevitable that their ‘temporary public ownership’ will last for some time, if getting value for our investment remains the most important objective for government. ”

By contrast, the US Treasury Department said earlier this year that it expects to make a $2 billion profit on the stakes it bought in US banks during the 2008 crisis.

The volume of gold bullion held to back shares in the SPDR Gold Trust (GLD), the world’s largest gold ETF, rose to within 0.07% of its all-time high yesterday, rising to 1339.6 tonnes during Thursday’s US trading.

Soros Fund Management increased its investment in the GLD by 49% to 1.32 million shares during the third quarter, according to the fund’s 13F filing with Securities and Exchange Commission. Hedge fund Paulson & Co., the GLD’s biggest investor, maintained its stake at 21.8 million shares.

In its quarterly Gold Demand Trends published yesterday, the World Gold Council notes that notes that gold investment through exchange traded funds was strong in Q3, in contrast with demand in many markets for gold coins and bars.

Ben Traynor
BullionVault

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben writes and presents BullionVault’s weekly gold market summary on YouTube and can be found on Google+

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

By TraderVox.com

Tradervox.com (Dublin) – The greenback strengthened against the euro as investors sought haven assets as concerns rose prior to President Barack Obama’s talk with lawmakers on fiscal cliff issues. The dollar Index is headed for a weekly advance for the fourth time in row. The advance has come prior to a report expected to show that US industrial production expanded at a slower pace in October. The Japanese currency has strengthened from six months low against the greenback as speculation that the drop was too rapid increased. The Swiss franc trimmed a weekly advance against the dollar after Thomas Jordan, the Swiss National Bank President, indicated that the currency remains strong and is putting strain on the economy.

According to Michael Derks, the Chief Strategist in London at FXPro Group Ltd, the meeting between Obama and the congressional leaders scheduled for today is unlikely to yield any fruits. He predicted that bids for the dollar will rise as investors avoid risk related currencies. In a situation where the US congress fails to reach an agreement by the end of the year, the $607billion spending cuts and tax adjustment will take effect. This will force the congress to increase the country’s debt ceiling above $16.4 trillion which will be reached early next year.

Obama will be meeting with Democratic and Republican congressional leaders today where they will be discussion fiscal cliff issues. The dollar has advanced by 1.6 percent in October while the yen has dropped by 1.4 percent in the same period.

The greenback rose by 0.3 percent against the euro to trade at $1.2740 per euro at the start of trading in London and increased by 0.2 percent against the yen to exchange at 81 yen. The dollar has pared a 1.9 advance against the yen. It had reached its strongest level against the yen yesterday of 81.46, last seen on April 25.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
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By Central Bank News
    The Central Bank of Sri Lanka held its benchmark repurchase rate steady at 7.75 percent, as expected, saying inflation eased in October and should decline further while the growth of broad money and credit to the public sector decelerated sharply in the third quarter.
    The central bank, which has raised rates by 75 basis points so far this year to control inflation, said the global economy should slow further due to the “absence of proactive leadership amidst economic contraction” in the euro area, but recovery may be supported by a joint effort between the U.S. and euro area following the conclusion of US presidential elections.
    Sri Lanka’s inflation rate eased to 8.9 percent in October from 9.1 percent in September due to lower food prices.
    “The onset of the intermonsoonal rains is likely to increase the supply of agricultural produce alleviating price pressures further,” the bank said.
    Sri Lanka’s inflation rose this year, peaking at 9.8 percent in July, due to changes in administered prices in March and the central bank expects this base effect to first disappear by March next year at which point the inflation rate expected to drop.

    The growth of credit to the private sector by commercial banks eased to an annual 25.5 percent in September from over 35 peak percent prior to April, the bank said, adding the government’s commitment to fiscal consolidation “is likely to provide comfort to the conduct of monetary policy in the years ahead.”
    Sri Lanka’s Gross Domestic Product slowed to an annual rate of 6.4 percent in the second quarter from 7.9 percent in the first quarter, with growth this year forecast to ease to 6.8 percent from 2011’s record 8.3 percent.

    www.CentralBankNews.info

Source: ForexYard

The euro was able to recover some of its recent losses against both the US dollar and Japanese yen yesterday, despite a report that the EU has slipped deeper into recession. Analysts attributed the bullish movement to disappointing US news and speculations regarding the outcome of an upcoming Japanese election. Today, a lack of significant international indicators means that there may be low volatility in the marketplace. Still, any announcements out of the euro-zone, particularly with regards to the debt situation in Greece, have the potential to generate significant trading activity.

Economic News

USD – Dollar Reverses Gains vs. Riskier Assets

The US dollar reversed some recent gains against its higher-yielding currency rivals yesterday, as fears regarding a slowing down in the US economic recovery weighed down on the greenback. The USD/CHF fell more than 30 pips during European trading, eventually dropping below the 0.9420 level. Furthermore, the British pound was able to gain more than 25 pips against the dollar during afternoon trading. That being said, the news was not all bad for the dollar. Speculations regarding the outcome of an upcoming Japanese election resulted in the USD/JPY reaching a 6 ½ month high during mid-day trading.

As markets get ready to close for the weekend, traders will want to monitor several indicators out of the US which could result in market volatility. The TIC Long-Term Purchases, Capacity Utilization Rate and Industrial Production figures all have the potential to generate additional dollar losses if they come in below their forecasted levels. That being said, any signs that the euro-zone is slipping even further into recession may lead to risk aversion, which could help the greenback.

EUR – Euro Gains May be Temporary

The euro hit a six-day high vs. the US dollar and a two-week high against the yen yesterday, despite news that the EU has slipped deeper into recession. Fears regarding a slowing down in the US economic recovery, highlighted by the upcoming “fiscal cliff”, and speculations regarding next month’s Japanese election were responsible for the euro’s bullish movement. The EUR/USD gained more than 50 pips during the European session to trade as high as 1.2793. Against the JPY, the euro moved up more than 100 pips, eventually reaching as high as 103.95.

Today, analysts are warning that the euro’s recent gains could turn out to be temporary, as uncertainties regarding the next round of Greek bailout funds may generate pessimism in the EU economic recovery. Any announcements from EU officials regarding Greece’s current economic status may lead to heavy volatility for euro pair before markets close for the weekend. That being said, if US data comes in below expectations during afternoon trading, the euro may be able to extend its gains against the dollar.

Gold – Gold Falls following Report on Global Demand

Gold took significant losses during European trading yesterday, following a report which stated that demand for the precious metal dropped during the third quarter of this year. Prices dropped by close to $15 an ounce over the course of the mid-day session, eventually reaching the $1710 level.

Today, gold traders will want to pay attention to what direction the dollar takes over the course of the day. If the greenback is able to regain some of yesterday’s losses against the euro, gold would become more expensive for international buyers, which could result in additional bearish movement before markets close for the weekend.

Crude Oil – Middle East Violence Keeps Oil near 1-Week High

An escalation in Middle East violence kept the price of oil near its recent one-week high during European trading yesterday. Crude traded as high as $87.05 a barrel, up close to $0.60, before once again turning bearish during the evening session and dropping back to the $86.30 level.

As markets get ready to close for the weekend, traders will want to continue monitoring the ongoing military conflict in the Middle East. Any escalation in violence could generate supply side fears among investors, which may drive the price of oil higher. Additionally, if US news comes in higher than expected today, oil cold extend its bullish trend.

Technical News

EUR/USD

Most long-term technical indicators place this pair in neutral territory, meaning that a defined trend is difficult to predict at this time. Traders may want to take a wait and see approach, as a clearer picture is likely to present itself in the near future.

GBP/USD

The daily chart’s Williams Percent Range has fallen into oversold territory, indicating that an upward correction could take place in the near future. Additionally, a bullish cross has formed on the same chart’s Slow Stochastic. This may be a good time for forex traders to open long positions.

USD/JPY

The Relative Strength Index on the weekly chart is approaching the overbought zone, signaling that this pair could see a downward correction in the coming days. Furthermore, the Slow Stochastic on the same chart has formed a bearish cross. Going short may be the wise choice for this pair.

USD/CHF

While a bearish cross appears to be forming on the weekly chart’s MACD/OsMA, most other long-term technical indicators show this pair range trading. Traders may want to take a wait and see approach, as a more defined trend may present itself in the coming days.

The Wild Card

Silver

The Williams Percent Range on the daily chart has crossed into overbought territory, indicating that a downward correction could occur in the near future. Furthermore, a bearish cross has formed on the same chart’s Slow Stochastic. This may be a good time for forex traders to open short positions ahead of a possible downward correction.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

According to a recent OECD report entitled ‘Looking to 2060: long-term growth prospects for the world’, China is forecast to surpass the Euro Area in a year and the United States by 2016 to become the world’s largest economy. The OECD believes China will experience more than a seven-fold increase in its income per capita by 2060. “The extent of the catch-up is more pronounced in China reflecting the momentum of particularly strong productivity growth and rising capital intensity over the last decade. This will bring China 25% above the current (2011) income level of the United States,” the organisation says.

Is it possible for China to become the world’s largest economic powerhouse without fully liberalising its financial markets to allow the Renminbi to become widely accepted internationally?  For those who trade FX, China’s monetary policy is nothing but a paradox. FX traders know only too well that efforts to make the Renminbi more flexible have been painfully slow. In light of the slowdown in its exports, and the subsequent decline of its current account balance, China currently seems reluctant to widen the Renminbi’s trading band. Calls for further currency appreciation have not fallen on deaf ears over the past several years, but have not been answered with the greatest enthusiasm either.

Take a look at Saxo’s infographic on the trade imbalance between China and the US: despite gradual Renminbi appreciation since the fixed peg to the dollar ended in 2005, Chinese exports to the US remain nearly four times greater than US exports to China. The US has accused China of contributing to their bilateral trade imbalance by maintaining the Renminbi at an artificially low level against the USD. Does this mean China has won the currency war? Meanwhile, its current account surplus has allowed it to pile up huge foreign currency reserves…

So what’s the future of the Chinese currency? The supertanker of Chinese Renminbi appreciation has slowed to a crawl and even reversed a little during 2012. This becomes self-fulfilling as the two things that move the currency are trade-related flows – and they have become not so favourable for the Yuan now because of the reduction in the surplus – and speculative flows. It was massively popular to speculate that the currency would strengthen. However, now you could say after a virtually-unchanged year that’s not front-and-centre for a lot of hedge funds. That supertanker could change direction completely if China fell off a cliff, there are rumours of a property collapse, or banks going bust. China could start seeing capital flight if it had an open current account and that’s why it doesn’t – China takes these very gradual steps. So traders who expect the ‘redback’ to soon become the world’s new reserve currency could be disappointed.

To view Saxo’s top experts’ views on the Chinese currency: download Saxo’s free e-book. To access Saxo’s and other traders’ views on other currencies, join the #FXdebates.

By Central Bank News