2 FX Trades Inspired by China

03/20/2012 11:40 am EST

Focus: CURRENCIES

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

New economic data from China often has the power to turn a risk-off environment to risk-on, explains Kathy Lien, who names two currency trades that often set up favorably on the heels of positive Chinese data.

Investors and traders are paying more attention these days to international events, especially China and the G20 countries. Our guest today is Kathy Lien to talk about what she’s looking at there.

Kathy, what’s on your radar here in terms of China and the G20?

This is a very important year in terms of China for the fact that it’s one of the very few places in the world where growth is happening. A lot of countries, including the US, and more particularly the ones in Asia, are leaning on China for growth, period.

So, lately, we’ve been seeing some nice upside surprises in Chinese economic data, and in the middle of February, we saw the Chinese government cut the reserve requirement ratio, which basically meant that they’re putting more money into the hands of banks so they could lend.

That’s really good news for all risky currencies, such as the Australian dollar (AUD), the New Zealand dollar NZD), and the Canadian dollar (CAD). It’s really good for stocks, and currencies are correlated to stocks. It means that China is going to avoid a hard landing. At worst, we’ll get a soft landing, and we may even get 8% GDP growth this year if we’re lucky.

So all of that for the time being means that there’s an underlying kind of buffer for the major currencies, and China is actually expected to cut the reserve requirement ratio by another 150 basis points this year.

More stimulus could be on the way, and I think that should make people feel a little bit more comforted in terms of the global risk environment.

Recommendations on how you would trade this with either a Chinese ETF or even buying the yuan; what do you do?

I think the best way to trade this in terms of the G20 currencies is that when the news comes out, there is a very good chance that you’ll see a rally, and the Australian dollar is one of the biggest beneficiaries. Also, the New Zealand dollar.

You can either trade in anticipation of the news, or after the news is released, because as I mentioned, they are expected to do a lot more this year, so it should just be a matter of time before more action follows.

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