Today, the most common currency is the Euro. And Europe as a whole is now mostly known for its EURUSD pair.
So, what is this type of currency? This is a Euro/US Dollar currency pair. It is actually basically a futures contract to provide a future reference rate to take account of a currency’s value against another currency.
In other words, it is traded on the open market in countries where one of the countries is widely used as a currency like US, UK, Japan, Canada, France and Germany’s home countries. The European countries have become one of the largest market for it.
China has for quite some time now been one of the major investors of it, and now they are the leading shareholders of it. Still, China is a huge market that accounts for almost 40% of the total volume traded in the past year. And even though there have been a few big fluctuations, currently the price of this currency pair is still stable.
However, that does not mean that the strength of the USD/CHF is unproblematic to China. Because the currency value is a good trading pair for Chinese currency, and any market imbalances cause it to rise and fall. Still, the stability of it has caused it to be adopted as a foreign exchange reserve in the country.
Because of the stability of the USD/CHF, China often trades the currency pair for its local currency in order to hedge the risks involved in it. That means that if the EURUSD pair moves up or down, the local currency value would also rise or fall.
This means that by trading the currency you will also be hedging the risks on the market. The USD/CHF is not a very volatile pair, but when it goes up or down, the local currency will also go up or down and vice versa.
Aside, from China, one of the largest investors of the USD/CHF is USA. As much as the country is known for its manufacturing industry, the USA is a big exporter of currency.
As a result, it is quite common for China to have a higher USD/CHF than USA’s local currency. China’s high demand of the USD/CHF and USA’s low demand for it, have lead to strong fluctuations in the currency pair.
But China should also know that the USD/CHF is not a reliable commodity that can always fluctuate within a set limit. It would eventually fall if China continues to trade it too much.
While China needs to control its currency to safeguard their own economy, they should also know that it is not going to be easy for them to keep a fixed level of the currency. And as they might have understood from history, it would be really hard to keep the Chinese economy stable if they cannot keep a certain amount of currency fixed.
Given the recent record lows of the EURUSD pair, and the actual number of traders buying it, it is hard to be sure that China will stick to its decisions to stay conservative with its currency. So what can one do?