Trading an Asian Currency Decline

Forex markets are trading an Asian currency decline after the death of North Korean dictator, Kim Jong Il. Both North and South Korean troops are on high alert. According to less than reliable North Korean news reports Kim Jong Il died of “exhaustion” while undertaking a train trip to visit various parts of his country. Not only did Asian currencies decline generally but so did Asia and Pacific stock shares on global markets. The obvious concern is that trouble on the Korean peninsula could escalate and affect trade throughout the region and exports to the world. In trading an Asian currency decline traders are also keeping their collective eye on Fitch Ratings which has downgraded the French AAA credit rating to negative and noted problems with both Spain and Italy due to the lack of an overall solution of the debt crisis in Europe.

Traders expect the effect of the dictator’s death to be short lived but there are a lot of issues involved in trading an Asian currency decline. First of all, Asia is not one society or country. Countries to watch include China, South Korea, Japan, the Philippines, Indonesia, Taiwan, Thailand, India, Malaysia, Singapore, and the nearly country and continent of Australia. Although all of these local currencies fell on the news not all will remain down, but some might.

The world economy has become so integrated that events in North America and Europe have direct and strong effects on the economies of Asia. Part of trading an Asian currency decline is anticipating which currencies might be most affected by a slowing European economy or outright recession. For technical traders the problem is also one of anticipating changes in market sentiment which can drive currency prices ahead of any hard news. Those trading Asian currencies need to watch the same sorts of data that those trading US dollars, Euros, and Yen do. For example, inflation figures in Thailand are about to come in and will have an effect on the direction of the Thai currency. Another issue in Thailand is that the country has experienced its worst flooding in 70 years. Because much of the insurance to cover flood related damage comes from overseas Thailand expects to see a large cash inflow when payments arrive. However, the economic damage from the flooding has been significant and may take some time to correct.

Thus, in trading an Asian currency decline, traders need to take into account local factors as well as global and regional economics. The decline of Chinese exports is a case in point. China will likely continue to push internal development in order to keep employment and economic growth high. However, China has the largest currency reserves in the world at just over $3 Trillion denominated in US dollars. It would like to internationalize the Yuan and that will require a loosening of currency restrictions. Many expect the Yuan to float higher with fewer currency controls. However, it may do exactly the opposite if twin recessions in Euro and North America hit hard at exports.