Forex News Trading Strategies

In this lesson, I will talk about the different ways how you can trade forex during key economic news events.

Most common used news strategies:



•Trading the Numbers
•Straddle the News
•Hedging the News

Trading the Numbers

Traders want to take advantage of the discrepancy between the forecasted and the actual key economic number when trading the numbers. As mentioned before, you need a very fast news data feed such as Reuters or Bloomberg because you want to get in the trade before the spike begins.

Steps to trade the numbers:

1. Purchase a fast news datafeed at Reuters or Bloomberg
2. Track the news consensus and determine the significance of the economic news report being released, if it is not important, do not trade it.
You will be able to find all important data on a good data calendar
3. For each important news release you need to know how large a discrepancy has to be in order for you to act on the trade.
4. Finally, watch the news release using your fast datafeed and trade the numbers.

Example:

UK CPI News Release

"There are three different numbers. There is the month over month CPI, there is the year over year CPI, and there is the core CPI. The most important number that most traders and economists will be focusing on is the CPI headline year over year number, which is expected at around 2.8%, same as it was last month.

If for some reason the number comes out at 3.1% or higher, it would set a new high in many years, and a possibility of a rate hike out of UK will probably be considered imminent, so GBP/USD may possibly go up by 80 pips or more in the first hour of the report.

If the CPI reads at 2.4% or lower, it would be a huge drop, and most would probably assume that the Bank of England will have to think twice before hiking the rate anytime soon, so GBP/USD may possibly go down by 80 pips or more in the first hour."

Possible scenarios:

If the consensus and the actual number is inline with the market expectations, you would not trade.
If the actual number is at 3.1% or higher, you would go long.
If the actual number is at 2.4% or lower, you would go short.

Below picture shows what happened that day. The number came out much better than expected and the GBP/USD spiked up.


GBP/USD CPI news release spike

Things to consider when interested in "Trading the Numbers":

1. You have only 0.5 - 2 seconds in which to act before the spike begins. Not fast enough? No money for you.
2. You really need to know how to read and interpret the numbers. Wrong interpretation will cost you money!
3. A fast news service is very expensive and is not recommended when you trade a small account because it's very unlikely to cover your data feed expenses.

Straddle the News

This strategy is very simple and consists of 2 limit orders, one to buy a few pips above the range high and one to sell a few pips below the range low, then wait for the price to breakout triggering one of your orders. Your stop loss order should be placed a few pips below the range low when buying, conversely, a stop loss order should be placed a few pips above the range high when selling.

An example: (See picture below):
Range high: 1.9938
Range low: 1.9919

Place an order to buy at 1.9941 with a stop loss order at 1.9917. Take profit at 1.9991.
Place an order to sell at 1.9916 with a stop loss order at 1.9940. Take profit at 1.9866.

That's it!


GBP/USD CPI news straddle strategy

Things to consider when interested in "Straddle the News" forex strategy:

1. False breakouts or whipsaws can occur, especially when the release came close or in line with market expectations and traders fade the breakout (i.e place trades in the direction opposite to the initial price movement). Worst case scenario, both stop losses get hit. Although the strategy relies on "true" breakouts it can still work during a false breakout if you take the profits quickly and don't get greedy plus you put very tight stops below or above the range to minimize the risk.

2. During key news releases, spreads can widen up and both buy and sell orders can be triggered at the same time. You will end up losing.

3. Slippage - During major fundamental announcements, both stop loss and limit orders may not be guaranteed to be filled at your price. 'Slippage' is the cost involved when currency traders enter the market at a price worse than the level they wanted to get into.

For example, a trader wants to sell GBP/USD at 1.9000 but the order is executed at 1.8999 rate. That 1 pip difference is slippage cost.

Hedging the News

What is hedging? Hedging enables a currency trader to simultaneously hold Buy and Sell positions in the same currency pair at the same time in one trading account.

Hedging News Strategy:

1. To hedge, go both long and short at market price 30 min before the news release.
2. Add a protective stop loss order to both long and short positions 30 seconds before the news release.
3. Add a limit order to both long and short positions 30 seconds before the news release.

Now wait...

Possible scenarios after the news release :

Whipsaw or false breakout - both stop losses can get hit.
No movement - nothing will happen to your open positions.
Price breaks out - one of your stop loss orders will get hit and hopefully, you will reach your target level on the remaining open position.

Source: http://www.aboutcurrency.com/

What is FOREX ?? (Foreign Exchange)?

Foreign Exchange (FOREX) is the arena where a nation's currency is exchanged for that of another. The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location and no central exchange (off-exchange). It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers.

Traditionally, retail investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets.

MG Financial, now operating in over 100 countries, serves all manner of clients, comprising speculators and strategic traders. Whether it’s day-traders looking for short-term gains, or fund managers wanting to hedge their non-US assets, MG's DealStation™ allows them to participate in FOREX trading by providing a combination of live quotes, Real-Time charts, and news and analysis that attracts traders with an orientation towards fundamental and/or technical analysis.

Source: http://www.mgforex.com/

The Fed remains worried about growth

The Federal Reserve released its first policy statement of the new year, and observers learned a few things. First, the Federal Open Market Committee remains wary about the weakness of the American economy:

Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.
I think the economic data that was coming in through December moved expectations from too pessimistic to perhaps a little too optimistic. Recent datapoints have been a little off—jobless claims have yet to hit the sub-400,000 level touched in late December, durable goods orders have softened a bit, and home prices are disappointing (though the housing figures should be treated with caution). The underlying trend in the numbers is clearly toward an accelerating recovery, but even a 4% real growth rate in 2011, which is possible, implies a long period of economic slack ahead.

Secondly, the shift in the make-up of the FOMC has not meaningfully altered the commitment to current policy, at least not yet. With the new year, perpetual dissenter Thomas Hoenig lost his voting status, but demand-side sceptics like Narayana Kocherlakota and Richard Fisher gained a vote. But the Fed's policy has not changed—the plan to purchase $600 billion in additional assets remains on track and the language on extended low rates is still in place—and indeed, the statement was supported unanimously for the first time in ages.

What remains uncertain is how this policy path will develop as the year proceeds. If commodity prices rise into the summer, will the consensus on the FOMC stand? It would be surprising if such a rise led to a big increase in core inflation given the huge slack in the labour market, but it's difficult to hold back rate increases when headline inflation jumpts to near 3%. If the unemployment rate does begin to drop meaningfully, will disputes arise over just where the new natural rate lies?

For now, the Fed's path remains easy. With unemployment too high and inflation too low, the central bank should adopt an aggressively expansionary approach. But can Ben Bernanke keep the hawks in line as recovery continues? We'll have to see.

Forex trading recommendations for 2011

Brad Bechtel, a managing director at Connecticut- based Faros Trading, gave IBTimes his forex trading recommendations for 2011.

He recommends shorting the U.S. dollar or euro versus the Canadian dollar or Australian dollar.

Below are the reasons behind his recommendations and broad general trends he sees.

‘Debt-Monetization’

“Japan, U.K., the European Central Bank (ECB), and the U.S. are engaged in significant amounts of -- call it what you want -- quantitative easing, monetization of debt, printing money, however people want to refer to it -- that is going to devalue their currencies,” said Bechtel.

He said out of these four currencies, it is difficult to forecast which one will devalue the fastest. Therefore, he recommends shorting it against the Australian dollar or the Canadian dollar.

10 publicly-traded companies entirely paid for by you (the taxpayer)
Four fool-proof tips on planning the perfect retirement from Smart401k
The central banks of Australia and Canada are engaged in monetizing their government debt. Moreover, their currencies are backed by commodities like oil and gold.

While Australia and Canada do face pressures on the housing front, these are secondary compared to the currency-devaluating policies of the U.S. and Europe, said Bechtel.

Furthermore, because the Australian dollar and the Canadian dollar have higher interest rates than the U.S. dollar and euro, they will pay investors the interest rate differential.

Pressures Against U.S. Dollar

Bechtel thinks emerging markets' central banks will diversify their foreign exchange reserves out of the dollar and into currencies like the pound sterling, the euro, and the yen.

This will be positive for these currencies and negative for the dollar.

The main driver of this, according to Faros, is China allowing its currency to appreciate more rapidly in response to domestic inflationary pressures.

As China does this, other exporting emerging markets countries will in turn allow their currencies to appreciate. One, they will be able to do so without losing competitiveness to China. Two, they will need to do so in response to their own domestic inflationary pressures.

As all these currencies are allowed to appreciate against the dollar, their country’s demand for the dollar will diminish.

Carry Trades

Carry trades are popular strategies used by institutional traders. This strategy involves borrowing (going long on) low-yielding currencies, typically the Japanese yen or the Swiss franc, and lending (going short on) high-yielding currencies like the Australian dollar.

Now, because the interest rate on the U.S. dollar is so low, investors executing the carry trade are shifting from the yen and Swiss franc as funding (borrowing) currencies and using the dollar instead.

As traders unwind their yen/franc denominated ‘legacy carry trades’ by buying back the yen and franc, these currencies will experience intermittent rallies. Meanwhile, as they put on new carry trades using the dollar as the funding currency, the dollar may experience intermittent bouts of weakness.

Source: http://www.ibtimes.com/

A Powerful Forex Trading Tool: Pivot Pint

Pivot Point Analysis is a robust and time tested method of market analysis. This strategy works in all markets that have an established range. The range is the high and low of a given time period and it accurately depicts the market participants exuberant bullishness and pessimistic bearishness for a given trading session.

The importance of these high and low formed in a trading session cannot be under emphasized. High is the reference point that shows buying out of greed while low is a reference point that shows selling out of fear. Fear and greed are the two emotions that rule any market.

Pivot Points Analysis depends on a number of mathematical formulas that are not very complex but that use these three important reference points the High (H), Low (L) and the Close (C).

Since there is no formal open and close in the forex market, we can take the NY Bank Settlement at 5:00 PM EST as the close of the daily trading session and 5:05 PM EST as the next day’s trading session open. It is rare to find the daily trading session go beyond the R2 and S2 levels.

R3 is the extreme resistance level that is usually caused by the news driven price shock and most of the time does not come into play. R2 is the level where the price action mostly experiences significant resistance. However, in case of a bearish market, price action will most often fail to break the resistance level R1.

Similarly in a bullish market S1 is important while in a bearish market S2 is important. S3 rarely comes into play and is only effective in an extremely bearish market caused by a news driven event.

Now, you might be feeling analysis paralysis due to information overload caused by too many levels used in pivot point analysis. Here is how you are going to filter these numbers. Pivot Point can be used as the actual trading number in determining the high or low of a given time period. Read the next article on how to filter these numbers.

Source: http://www.financialnewsline.com/

Where Should I Invest My Money?

Every retail investor wants to put his hard earned money to work to maximum potential. Investing in debt instruments, like fixed deposits or NSCs is what everyone knows about. But the problem is, no debt instruments can give you rock star returns. Inflation, aka “Rising costs” eat up most of the interest benefits that you get from these investments. Typically, interest rates on FDs, NSCs and other schemes are 6 to 8% and same is the rate of inflation.

So, if you want to have non linear returns from your money, shares aka stocks is the only long term way that has delivered returns to WISE investors over the years. The term wise is very important here, as the difference between returns received by the best and the worst investors are as different as the sky and the earth. Here are some points to ponder:

Even if you invest in an index, you generally get better returns than debt over a long term. E.g. BSE Sensex has grown about 15-16% per year over last 10-12 years. There have been some years when it has grown negatively, but that’s why it is recommended to invest in equity for long term, for most people, who can’t give much time to making investment decisions. The difference between a 16% per year return and 7% per year return is quite significant. 10,000 Rs. become nearly 2 lakhs over 20 years with 16% returns, whereas with 7% returns, they only turn into 3.8 lakhs in 20 years.

Also don’t forget the dividend yield that you get. It is a nice bonus that you can use to reinvest your money.

Of course, what matters is “Choice”. If you could pick an Infosys or a Bharti Airtel 10-15 years ago, you would be filthy rich even by investing smaller amounts in these scrips.

4. Picking losers – There is of course a risk factor to equity. For example, if you had bought DLF in early 2008, it was trading at around 1000 Rs. and now it languishes at around 300 Rs now, after 2.5 years. So your sum of 100,000 would have become a measly 30,000 Rs! In the same period, a 7% FD would give you a relatively healthy total return of around 1,18,000 Rs.

For most people, mutual funds are a safer route. They generally can’t give you muti-bagger returns, but can outperform the basic index (Sensex or Nifty) over the long term. But, even in MFs, there are winners and losers.

The truth is, whatever the marketers may tell you, that a lot of people make wrong decisions in markets, and lose money. Only a handful of companies become “blue chips” over the long term, and the choice of what you buy matters a lot.

If you like doing your own research, you should stick to some basic principles, like thoroughly reading annual reports of companies before investing. At least thoroughly read some brokerage reports before making the decision.

Mutual funds is a relatively safer avenue, but it doesn’t mean you can put your money in any fund or scheme that “the sales guy” recommends. You need to research the funds by looking at NAV charts, the exit loads, and most importantly, what kind of fund it is. It also depends upon your risk appetite.
Source: http://www.financialnewsline.com/

Penny Stocks: The 3 Best Things To Look For In A Penny Stock

When traders work to be a winner at trading penny stocks, there has to be a great deal of consistency with your tactics and the behavior of the market. A specific plan of entry and exit is necessary on every trade. Without one, you are going to crash and burn and will most likely never make a real income on penny stocks. No one asks for failure, so why do so many traders fail? From my research, here are the 3 top features to find in a good penny stock that help make your trade succeed.

When you get started, the foremost trade indication is that the company has a competition advantage versus other companies. This requires having built new deals with larger companies or a fresh source of territory to build and do business in. A prime factor to find is a contract with a well known business when getting ready to pull the trigger.

Also, be sure to have a look at the earnings report of a penny stock you are looking to trade. This means searching through for a upwards trend in profits. It’s absolutely necessary to see a rising earnings pattern without a rise in penny stock value. The odds are, this will lead to a spike in price in the near future.

Finally, get a micro cap stock with a technical analysis that reads positive. If you are unfamiliar with technical analysis, most patterns are simple to get the hang of, so look for a common one like the double bottom or the ascending triangle. One or the other can be an indicator of things to come and will create a much greater chance the trade will be successful.

Pound for pound, penny stock trading is a test of knowledge and patience. After all, if not for the challenge, no one would fail! Yet fortunately, by taking the correct path and trading on a proven system, you can make much better profits. Make sure you are always finding the right penny stocks to watch and you can make quite a killing with penny stocks!

Tired of getting in on the wrong trades? Visit my site to find which penny stocks to watch to make the most money trading stocks! You’ll learn about tons of secrets and help you make a fortune with penny stock trading in order to at long last see some regular profits coming in off of penny stock trades.

source: http://www.financialnewsline.com/

Strengths Of Fx Dealing

Fx Trading has numerous benefits as compared to share or fairness trading. Due on the current uncertainty of the commodity market, quite a few inventory or fairness traders are now thinking to commerce the Forex trading market. Their principal question and concerned was why commerce the Currency trading market? What are the benefits of the Forex industry as compared towards the investment market place? In this article, I will go via some of the rewards of Foreign exchange Trading.

24 Hour Global Industry – The Foreign exchange market place is truly a 24 Hour International Market opens from Monday to Friday. The Forex market place starts each buying day from Sydney, Tokyo, London, and finally to New York. No matter regardless of whether it is inside the day or night, you can find generally market participants actively trading the Currency trading market. Currency trading traders can respond incredibly rapidly to any forex fluctuations or breaking news immediately unlike the share and future market. The ECN’s (Electronic Communication Networks) in inventory and long term current market are relatively new products derived as an after hours extension on the regular trading hours. Several of these ECN’s have ill liquidity and there’s no guarantee that a trade will be executed, or at a honest price. Commonly, commodity or future current market traders would need to wait until the true marketplace opens the next morning so that you can execute a trade at honest value.

Liquidity – The Forex market is the largest and most liquid market place from the world. According to a survey conducted by the Bank for International Settlements (BIS) in April 2007, average every day dealing volume for the Forex industry reached an all-time record high of US$3.2 Trillion. A 71% raise from US$1.9 Trillion that was traded in April 2004. This enhance is due mainly towards the participation of retail traders utilizing broker’s electronic buying and selling platform. This tremendous turnover is far more than all the world’s share markets combined on any given day. With a everyday buying and selling volume larger than all inventory current market combined, this will ensure price stability. With such liquidity, Foreign exchange Trader can open or close a position devoid of substantially difficulty and most importantly, will receive a honest industry price.

Opportunity to Make Funds in Each Direction – There is no such thing as “bull” or “bear” current market in Forex. In Forex trading, it really is of no concern no matter whether the economic system is booming or in a recession. For inventory dealing, profits are typically made when the economy is booming. But we all know that the economic cycle is cyclical – all things that go up must come down. This isn’t the case in Foreign exchange market. Regardless of how significant economies are performing, currency exchange rates are generally fluctuating, and this in turn will provide buying opportunity for traders to acquire profit.

Simplicity – There are not quite a few key currency pairs traded on the Currency trading market. Therefore, traders may perhaps have a greater feel of value movement patterns and behavior. Where as inside inventory market, there’s literally thousands of stock to monitor and it just isn’t simple to follow so a lot of of them.

Modest Investing Capital with Excessive Revenue Probable – Nowadays, the minimum total required to open a trading account is less than $300. As a result of competition, some brokers may well even accept considerably lesser amount. In Foreign exchange market, this modest buying amount could potentially earn hundreds of dollars per week. In investment industry, this may possibly not be possible. Of course each market place have probable to lose as properly, but from the Fx current market, traders can make great cash with substantially lesser dealing capital.

Substantial Leverage of 100:one – one hundred:one leverage is commonly accessible from on-line Forex brokers. This is substantially exceeds the common 2:one margin offered by equity brokers, and 15:1 from the futures market. Some brokers even offer higher leverage of 100:1. Even so, it can be vital to remember that although this kind of leverage allows traders to maximize their profit potential, the potential for loss is equally great. Leverage is really a double-edged sword and necessitates the use of right income management. Without having right risk management, this large degree of leverage cans also lead to big losses along with gains.

Demo Account – Forex Buying and selling has a unique feature called “Demo Account” or simulate account. This “Demo Account” permits the trader to commerce utilizing real-time cost on the broker’s buying and selling platform with the exact interface and function as a actual account. With this simulated account, Forex trading trader could acquire genuine marketplace experience in buying and selling without having risking any capital.

Source: http://www.financialnewsline.com/

Best Forex Trading Strategies: Forex Day Trading Strategy Secrets

Most forex traders are searching for the best Forex day trading strategy secrets and the best systems for growing forex trading profits, the information below ought to assist you on both areas. FOREX trading is nothing more than direct access trading of different sorts of foreign currencies. During the past, foreign exchange trading was largely limited to giant banks and institutional traders Latest technological improvements have made it thus that small traders may even exploit the many benefits of FOREX trading by by means of the variety of online trading platforms to help your Forex day trading strategy.

The Market Background

FOREX markets have distinctive features that offer unparalleled capacity for rewarding trading in any market or any step of the commercial enterprise cycle. For starters, FOREX trading boasts a 24-hour market, giving traders the opportunity to reap the benefits of advantageous market conditions anytime. Secondly, the FOREX market is the greatest liquid market within the world. FOREX traders may enter or exit the market whenever they need, during nearly any market condition. There even exist nominal execution barriers or risk and no daily trading restrictions.

Forex Day Trading: The Flaws

For all the benefits of the FOREX market, 1 glaring weak point emerges. The FOREX market is seen as unregulated though the operations of major dealers, for example commercial banks in money centers, are regulated under the banking legislation. The daily functions of retail FOREX brokerages aren’t regulated by any laws or rules particular to the FOREX market. Lots of of these sorts of establishments within the United States, do not even report back to the I.R.S. To make the most of the explosive promise of successful FOREX trading, people ought to keep to these guidelines for a superior Forex day trading strategy.

1.Determine the quality of the broker institution you opt for. In contrast to equity brokers, FOREX brokers are usually connected to large banks or lending institutions due to the huge quantities of capital that’s required. FOREX brokers should be registered with the Futures Commission Merchant (FCM) in addition to regulated by the Commodity Future Trading Commission (CFTC)

2. Make a Request of a free trial. Before you commit to any broker, be certain to ask for free trials so that you can test their alternative trading platforms. Brokers generally provide technical as well as elementary commentaries, economic calendars and different analysis as a means of helping you. Basically, a top quality broker can provide all that one needs to be successful.

3.Monitor two monetary conferences to supply knowledge into the upcoming FOREX market. Two important conferences FOREX traders ought to watch for are the federal Open Market Committee and the Humphrey Hawkins Hearings. By reading the reports and studying the commentary, FOREX basic analysts can get a greater comprehension of any and all long-term market trends it also permits short-term traders to be able to profit from extraordinary happenings.

Forex Day Trading Strategy: Summation

There is no doubt there is substantial amounts of money to be made within the forex marketplace with the right number of know-how and the proper system in place. I hope the information above has supplied you some insight into a successful Forex day trading strategy.

Source: http://www.financialnewsline.com/

China's Currency: The rise of the redback

IN 1965 Valéry Giscard d’Estaing, then France’s finance minister, complained that America, as the issuer of the world’s reserve currency, enjoyed “an exorbitant privilege”. China’s president, Hu Jintao, does not have quite the same way with words. But on the eve of his visit to America this week he told two of the country’s newspapers that the international currency system was a “product of the past”. Something can be a product of the past without being a thing of the past. But his implication was clear: the dollar’s role reflects America’s historical clout, not its present stature.

Mr Hu is right that America’s currency punches above its economy’s diminished weight in the world. America’s share of global output (20%), trade (only 11%) and even financial assets (about 30%) is shrinking, as emerging economies flourish. But many of those economies, such as South Korea, still sell their exports for dollars; many, including China, still peg their currencies to the greenback, however loosely; and about 60% of the world’s foreign-exchange reserves remain in dollars.

This allows America to borrow cheaply from the rest of the world. Its government has been able to overspend, secure in the knowledge that its IOUs will be bought by foreign central banks, which are not too fussy about price. America would show more self-discipline, many Chinese believe, if the dollar had a little bit more competition.

Related items
China's currency: Stranger than fiction
Jan 20th 2011
The rise and fall of the dollar: Go with the flows
Jan 20th 2011Could the yuan become a rival? China’s economy will probably surpass America’s in outright size within 20 years. It is already a bigger exporter. It is prodding firms to settle trade and even acquire foreign companies in its own currency. That is adding to a pool of “redbacks” outside its borders. These offshore yuan are, in turn, being tapped by borrowers, issuing “dim sum” bonds in Hong Kong.

But as the dollar’s history shows, economic clout is not enough without financial sophistication. If foreigners are to store their wealth in yuan, they will need financial instruments that are safe, stable and easily sold. Dim sum makes for a tasty appetiser. But the main feast of China’s financial assets is onshore and off-limits, thanks to its strict capital controls. The government remains deeply reluctant to let foreigners hold, buy and sell these assets, except under tight limits. Indeed, it is barely ready to give its own people financial freedom: interest on bank deposits is capped; shares are largely owned by state entities; and bonds are chiefly held by the banks—which are, in turn, mostly owned by the state.

Over time China will relax its financial grip. But even if it could usurp the dollar’s role as the world’s currency, it will not replicate the American set-up. The United States takes advantage of the dollar’s position to borrow cheaply from the rest of the world, selling its assets in return for goods. China is a mirror image of this. It runs a trade surplus, selling goods in return for financial claims on foreigners. Its firms, households and government save more than they can invest at home.

A different kind of perk

Rather than seeking to borrow in its own currency, China may harbour the opposite ambition: to lend in its own currency. The exorbitant privilege it may covet is a lower foreign-exchange risk on its savings. On top of the trillions China has lent to America’s treasury, it also holds stakes in Australian mines, African farms and Swedish car companies. But because none of these assets is in yuan, China suffers a capital loss whenever its currency strengthens. It would no doubt like to share some of this risk with the rest of the world. The model is not America, but Germany, an international creditor which holds 70% of its foreign assets in euros.

There is a catch, though. No one will want to borrow in a currency that is only ever going to strengthen, increasing the value of their debts. So if China wants to “yuanify” some of its claims on the rest of the world, it will need a currency that can go down as well as up. To make people believe the yuan can fall tomorrow, China will have to loosen its currency’s peg and let it rise faster today. China is different from America: it is a rising economic power and a thrifty one. But one rule still holds: China will have to open its financial system to the world if the yuan is to be the dominant currency.