Fundamental Analysis : How China Affects the Markets

How China Affects the Markets

No guide on fundamentals can possibly overlook the role that China plays in world trade today. Not only does China possess the world’s largest population (around 1.3 billion), it is now the world’s second largest economy while still being classified as a developing country. Essentially you should regard China as a leviathan, a super -organism that takes in huge amounts of resources and puts out a colossal number of consumer products. This dynamic alone is enough to have knock-on effects that touch almost everything else on the world’s markets.

Put simply, when China experiences growth this growth directly impacts the rest of the world. However both binary and forex traders should know the economies that are most affected by China’s economic growth and industrial output.

One of the essential economic relationships to be aware of is between China and Australia. China is a great importer and Australia is a big exporter. China imports many of its key resources from Australia. So Chinese growth translates directly to increased demand for Australian commodities, this translates directly to a rise in the value of the Australian dollar. So in this way you can observe how monitoring China’s economy is vital for both traders interested in currencies (in this case the AUD/USD is a particularly good candidate due to how positively the Aussie dollar is affected by increased Chinese demand), but also commodity, stock and index traders who can find all find assets to trade on that are affected by this growth, be they commodities such as copper, mining stocks of the companies increasing their output due to increased demand, and the major indices of the Asia-Pacific region.

This relationship is emblematic of how growth fuels the global commodity markets. It’s actually a cycle without a beginning or end. Growth is fuelled by the commodities that are essential to creating it, which leads to increased demand and a rise in value of those same commodities. We will go into this dynamic in a forthcoming post.

Back to China for the moment, the two assets that connect most obviously to Chinese growth are the aforementioned AUD/USD currency pair and copper. This is evidenced by the strong correlation between AUD/USD and the Shanghai Index, which is often found to be at around 90%. In fact this relationship is a strong indicator for traders wishing to determine whether Chinese data should translate to profitable trades on AUD/USD. It is important to bear in mind that these relationships are by no means set in stone. They do change over time, sometimes even reversing completely, but this is why monitoring Indices are also very important both in binary trading and in forex.

To recap, trading AUD/USD and copper can be regarded as trading the same event in many ways, due to this historically strong correlation. The way to determine whether the correlation is strong enough to justify using one as a benchmark for the other is to compare how closely AUD/USD is tracking the price action of the major Chinese indices.