All the tea in China

Twenty or 30 years ago, it wasn’t uncommon to hear the opinion that when (not if) China abandoned communism and a centralized economy for democracy and free markets, it would become an economic 800-pound gorilla. Western businesses salivated for years at the prospect of tapping into the potentially largest consumer market in the world. They began to make small inroads when the Chinese government started loosening some reins after Mao Tse Tung’s death in 1976. But events such as the stand-off in Tiananmen Square in 1989 made clear the old guard was only loosening reins, not letting go of them entirely.
Nevertheless, in 2005 China has managed to gallop to the front of the economic pack without officially disavowing a communist society. As capitalism has gained traction, China’s huge populace is producing goods and acquiring possessions like never before, although on a per capital basis it is still earning and spending at rates that would seem austere to most Westerners.

China’s economic explosion has been attributed with (amont other things) driving global commodities prices higher, expanding the U.S. trade deficit, and, by association, threatening to upset worldwide currency markets because of its decision to keep the yuan pegged to the dollar rather than allowing it to float freely.
Whether this will continue — and what will likely happen if it does not — is the subject of “What’s on the horizon for the Chinese yuan?” There are a few scenarios, including a yuan that is allowed to fluctuate in a fixed range, and different opinions on how this will affect the forex market.
In "The Golden Goose Rule," Barbara Rockefeller toucheson the issue of China in the context of a larger discussionabout a potential reconsideration of the health of the U.S.economy and whether other countries will lose their appetite for our paper assets. Their sustained hunger hasbeen financing our record deficits, but there are those who worry they may be full and ready to pull away from the table.
For now, traders interested in techniques for free-floating currencies can experiment with ideas in the Currency Characteristics and Trading Strategies sections.
“The current account deficit’s impact on the U.S. dollar” examines whether the quarterly current account numbers are responsible for regular patterns in the U.S. dollar. In “Volatility based currency trading,” contributor Kathy Lien discusses two simple techniques — inside bars and
short-term/long-term volatility comparisons— for exploiting volatility characteristics in the forex market.

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