Currencies make the world go round, and the foreign exchange (forex) market is the most heavily traded market in the world. People, businesses and countries can all participate in the forex market, making currencies trading extremely popular because it’s also one of the most accessible. Foreign exchange quite simply refers to the exchange of one currency for another, such as buying Euros using US dollars. Currencies are traded in the markets in pairs and this shows their value in relation to others. An example is the US Dollar (USD) and the Euro (EUR) which form the EUR/USD pair, the most commonly-traded in the world.
Over 2020, the financial markets were a rollercoaster ride for traders as currencies in the forex market leapt up and down to an extreme extent. This was largely due to the fact that many factors influencing an economy will invariably influence currencies as well. For example, interest rate changes, inflation adjustments and government debt, to name a few. With the pandemic driving a number of changes for all of these factors, currencies trading became a wild ride for investors last year. However, one country that stands out for exceptional performance is China, as the Chinese Yuan has led the way for economic recovery from the pandemic.
Let’s delve deeper into how the Chinese Yuan strength has persisted and how the country has now become a frontrunner in the world of digital currencies.
China’s economy stands strong
China has been flexing its economic strength during the pandemic, as it was the only economy that recorded positive growth in 2020 amidst the Covid-19 chaos. The Asian economic giant’s GDP sailed past the 100 trillion Yuan ($15.5 trillion) mark in 2020, which was an increase of 2.3%.
With the economy continuing to grow, this meant that the Chinese Yuan performed better than many other currencies over 2020 in the markets, even with the negative effects of the pandemic. This year, the Yuan has been particularly volatile as a result of the Chinese New Year. While both the EUR/CNH and USD/CNH rates have risen over the last few weeks, February usually sees volatility for the Chinese Yuan, given the impacts of the Chinese New Year. After a 2020 that included a massive 9% decline between the 27th of May and the 31st of December, the USD/CNH pair started 2021 with a slight dip of 1.3% between the 3rd of January and 15th of February, before rising 1.5% over the next five days by the 25th of February.
Similar to USD/CNH, the EUR/CNH pair suffered quite a plummet last year as well, dropping 4.3% between the 30th of July and the 31st of December, and beginning this year with another decrease of 2.6% between the 3rd of January and the 4th of February. Since then, the EUR/CNH pair has risen 1.3% to begin March at a closing price of 7.80943 on the 3rd. With vaccination programs in full swing across many countries, it will be interesting to see how the top currencies will perform in the forex markets throughout the rest of the year.
Digital currency leader
Not only is China a frontrunner when it comes to economic recovery from the pandemic, it is also a leader in the digital currency world. China is developing a Central Bank Digital Currency (CBDC) of its yuan fiat currency and has already tested out the Digital Currency Electronic Payment (DC/EP) last year. It has taken the country just over five years to develop the digital yuan, which is currently being rolled out across major e-commerce platforms in the country. DC/EP is basically a digital version of the Chinese Yuan, and while it may sound like a cryptocurrency, it’s quite different for a number of reasons. First of all, it is run by a central authority (the Chinese government) while cryptocurrencies are fundamentally the opposite, running on a decentralized finance system (DeFi) and blockchain. DC/EP can be used as a form of payment because it is accepted as legal tender, while traditional cryptocurrencies are not recognized by any element of the Chinese banking system. Lastly, DC/EP is not anonymous, allowing the Chinese government to track the currency’s usage—another complete opposite of the anonymity that’s characteristic of cryptocurrencies like Bitcoin.
So why did China develop a digital currency? The idea is for the digital currency to help the government make more informed decisions as they can keep track of money as it flows through the economy. Simply put, a digital currency is easier to track than cold hard cash. A vast amount of China’s population do not use banking institutions, and a digital currency will allow these people to enter the mainstream economy. The hope is that this digital currency will help China’s currency to reach an international level, where the US Dollar is still the most widely used.
As the biggest market in the world, the forex market runs 24 hours a day, 5 days a week, making it highly accessible to many people throughout the world over several time zones. The volatility we have shown of top currencies like USD/CNH and EUR/CNH may present both opportunities and risks for those who invest in CFDS or Contracts for Difference. CFDs allow you to take advantage of price movements in both directions—increases as well as decreases—of top currencies like those we’ve discussed, and many others, without having to purchase the underlying asset (in this case any actual currency). Need an example? Let’s say you think the price of USD/CNH will increase—in that case, you’d open a ‘Buy’ deal or ‘Go long.’ However, if you expect the price to decrease, you could open a ‘Sell’ deal or ‘Go short.’ Essentially, trading CFDs gives you the opportunity to trade on volatility.
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