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Tue, September 6, 2022
Could China’s Yuan replace the U.S. dollar as the world’s dominant
currency? Here’s how the Asian nation's trade supremacy is quickly boosting
its reserve status
China’s economy has been immensely successful by most measures. Its gross
domestic product (GDP) of $17.7 trillion is second only to the United
States. It’s also the third-largest trading nation in the world — behind
only the U.S. and E.U.
Achieving reserve currency status isn’t a formal process. Instead, it’s
like winning a popularity contest.
The most popular currency for global trade and cross-border commerce
emerges as the de facto reserve currency. The “popularity” of a currency is
simply based on the perception of security and resilience of the issuing
country. This is the asset or currency that most central banks across the
world prefer to hold in reserve, which is why the dominant asset earns the
label of “reserve currency.”
Since 1450, there have been six major reserve currency periods. Portugal
dominated the global reserves until 1530 when Spain became stronger.
Currencies issued by the Netherlands and France dominated world trade for
much of the 17th and 18th centuries. But the emergence of the British
empire made the Pound Sterling the reserve currency until the end of the
First World War.
The U.S. dollar displaced the pound just as America gained economic
superiority over Britain. More than 75% of global transactions have been
completed in U.S. dollars since 2008.
Although the dollar’s grip on all these markets and instruments has been
gradually declining in recent years, no other currency comes close to these
levels. The Chinese renminbi certainly isn’t a viable alternative, but
geopolitical and macroeconomic trends support its rise to dominance.
China’s plan
This year, Chinese leaders made it clear that they wanted to
boost the renminbi’s profile as a reserve currency. China’s economy and
trade flows are large enough to support such a move. However, the country
now needs to convince foreign central bankers to start holding the Chinese
Yuan (the principal unit of the renminbi) in reserve.
In July, The People's Bank of China announced a collaboration with five
nations and the Bank for International Settlements to achieve this. China,
along with Indonesia, Malaysia, Hong Kong, Singapore, and Chile would each
contribute 15 billion yuan, about $2.2 billion, to the Renminbi Liquidity
Arrangement.
Meanwhile, the Chinese Yuan has already become a de facto reserve currency
in Russia. Russian leadership turned to China after facing sanctions from
the West due to its invasion of Ukraine earlier this year. Now, 17% of
Russia’s foreign reserves are denominated in yuan. The yuan is also the
third most demanded currency on The Moscow Exchange.
As these partnerships become stronger, the yuan’s status as a reserve
currency could be further entrenched.
The global impact
Economists including Barry Eichengreen of the University of California
Berkeley and Camille Macaire of France’s central bank published a paper
analyzing the yuan’s potential as a reserve currency. The researchers argue
that replacing the dollar isn’t going to be easy or quick. However, they
found evidence that yuan reserves were steadily increasing in countries
that had tighter trade relations with China.
This growing influence could make the yuan an alternative to the U.S.
dollar in a “multipolar” world. In other words, China might chip away at
the dollar’s influence over time. The study’s authors said the renminbi’s
current position was similar to the U.S. dollar in the 1950s.
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BRICS President:
Russia And India Have No Need For The U.S. Dollar
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Monday August 29, 2022
Russia and India no longer need the U.S. dollar for mutual settlements,
said BRICS International Forum President Purnima Anand.
A new mechanism has been established between the two countries, using only
rubles and rupees, Anand told reporters last week.
"We have implemented the mechanism of mutual settlements in rubles and
rupees, and there is no need for our countries to use the dollar in mutual
settlements," Russian state news agency RIA quoted Anand as saying.
Anand added that a similar mechanism is being developed between Russia and
China to eliminate the use of the greenback and employ only rubles and
yuan.
This way of paying for goods gives Russia a way to go around the sanctions
imposed on the country following its invasion of Ukraine.
"The BRICS countries are opening up to Russia, offering the
opportunity for the country to overcome the consequences of
sanctions," Anand said.
Russia has also increased its ties with India, as trade jumped fivefold
over the past four decades, according to Anand. India has been importing
more oil from Russia, while Moscow has stepped up purchases of agricultural
products, textiles, and medicine.
India has resisted the pressure from the West to ban Russian oil.
"When Russia's military operation in Ukraine began, naturally there
was pressure on India to stop importing Russian oil. But the Ministry of
Foreign Affairs had to reject this pressure. The Russian side was assured
that supplies would not be stopped and the sanctions regime would in no way
affect the relationship between our countries," Anand stated.
Earlier this summer, Russian President Vladimir Putin said that Brazil,
Russia, India, China, and South Africa (BRICS) are developing a new
basket-based reserve currency.
Analysts see this new BRICS reserve currency proposal as an alternative to
the U.S. dollar and the International Monetary Fund's (IMF) Special Drawing
Rights (SDRs) currency.
"One can only think this is a move to address the perceived
U.S.-hegemony of the IMF and will allow BRICS to build their own sphere of
influence and unit of currency within that sphere," said ING global
head of markets Chris Turner.
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Putin's BRICS New Currency Could Benefit Gold and Bitcoin –
Analysts
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Thursday August 25, 2022
With the global de-dollarization trend accelerating, the two assets that
could stand to benefit are gold and the crypto space, according to
analysts.
Earlier this summer, Russian President Vladimir Putin said that Brazil,
Russia, India, China, and South Africa (BRICS) are developing a new
basket-based reserve currency.
"The issue of creating an international reserve currency based on a
basket of currencies of our countries is being worked out," Putin said
at the BRICS business forum at the end of June. "We are ready to
openly work with all fair partners."
The five countries are also trying to create an alternative mechanism for
international payments, he added.
BRICS could also see its membership expand, with Turkey, Egypt, and Saudi
Arabia considering joining the group.
Analysts see this new BRICS reserve currency proposal as an alternative to
the U.S. dollar and the International Monetary Fund's (IMF) Special Drawing
Rights (SDRs) currency.
"One can only think this is a move to address the perceived U.S.-hegemony
of the IMF and will allow BRICS to build their own sphere of influence and
unit of currency within that sphere," said ING global head of markets
Chris Turner.
Russia's efforts to de-dollarize are far from new, but they have been
accelerated following Western sanctions placed on Russia after its invasion
of Ukraine at the end of February.
"The speed with which western nations and its allies sanctioned
Russian FX reserves (freezing around half) no doubt shocked Russian
authorities. The Central Bank of Russia effectively admitted as much and no
doubt some BRICS nations – especially China – took notice of the speed and
stealth at which the U.S. Treasury moved," Turner pointed out.
"BRICS nations may therefore feel they need an alternative reserve currency
to match something like the IMF's SDR."
Safety, liquidity and return make a great reserve currency, which is why
BRICS could potentially look toward gold, he added. "We doubt the
mercantilist nations involved in BRICS would want to transfer valuable FX
reserves into this more local sphere of influence. If they are worried
about the path of sanctions and the increasing weaponization of the dollar,
they, like Russia, might prefer to move into gold," Turner said.
"Our base case is that the U.S. will enter a recession somewhere in
October or November, which will last until the middle of next year.
Typically the dollar loses strength when signals say the U.S. is coming out
of recession. So, if our base case is correct, you could see the dollar
start acting weaker in Q1 of next year in anticipation of that," he
described.
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WSJ MarketWatch:
If You Need One More Reason Why Stocks Will Likely Lose Money In September,
Here It Is.
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Sept. 2, 2022
Beware the Federal Reserve’s double-tightening
Finally, investors have a good reason for why the U.S. stock market will
suffer above-average volatility and below-average performance this month:
It’s the Fed.
I say “finally” because market analysts for weeks now have been searching
for a reason to bet that 2022 will see a repeat of September’s famous
seasonal tendency to be bad for the stock market. A week ago, I described
September’s historical weakness as an “unsolved mystery.”
To be sure, the mystery still remains for any other year besides 2022. But
there’s no mystery about what the U.S. Federal Reserve will be doing this
month: In addition to continuing to aggressively raise interest rates, the
U.S. central bank will be significantly accelerating the pace at which its
balance sheet is being reduced.
At a minimum, this double-tightening can be expected to increase market
volatility. Kent Engelke, chief economic strategist at Capitol Securities
Management, focused on this consequence in a note this past week to
clients: “Writing the obvious, the markets and the economy are entering
into era that no one has yet experienced. Moreover, because of the lack of
experience, mistakes will be made. One trader described today’s Fed policy
as driving 60 MPH over ice and pulling the emergency brake.”
The Fed’s double-tightening will lead to stock-market losses.
“Quantitative tightening will double to $95 billion a month in September.
The jump will be all the greater as QT has run behind schedule this summer:
the Fed’s balance sheet dropped by $63 billion since QT started on June
1st, about half the promised pace. Furthermore, the recent jump in mortgage
rates has reduced prepayments so the Fed will likely need to actively sell
mortgage-backed securities to meet its $35 billion monthly quota, rather
than passively letting them roll off its balance sheet.”
It’s a bad sign that the stock market has already declined so much in the
wake of a modest dip in the Fed’s balance sheet. This suggests that equity
markets are more addicted to monetary easing than ever. It’s scary to
contemplate how much pain will be necessary to cure the market of its
addiction.
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This Is The
Scenario In Which Gold Price Jumps $300 This Fall – RBC Capital Markets
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Wednesday, August 31, 2022
Even though gold is heading for its fifth monthly drop, a high price
scenario of above $2,030 an ounce cannot be ruled out this fall, according
to RBC Capital Markets.
"The large rally that we saw at the beginning of the year,
particularly as Russia invaded Ukraine, was the type of crisis performance
typical of gold," Christopher Louney, commodity strategist at RBC
Capital Markets, told Kitco News.
But since then, gold has fallen from its yearly highs. And that's because
the particulars of this type of crisis were negative for the precious
metal, Louney explained.
"It takes economic and financial fallout to get gold to perform more
strongly in the long term," he said. "And even though there's
certainly been financial and economic fallout, this crisis played out in a
way that means higher rates and a stronger dollar, which when we think of a
crisis, is not always the case. That's part of why gold is priced the way
it is."
But the heightened geopolitical tensions could still support gold into the
year-end, which is why a price tag above $2,000 is still possible this
fall.
"Gold's tug of war is happening against a high-risk environment. One
where there is a war in continental Europe that's ongoing. Also, I wouldn't
write off U.S.-China tensions over Taiwan. On top of that, there are the
broader geopolitical trade intricacies of what is happening in terms of an
energy crisis and economic performance more broadly," Louney pointed
out. "There is this high-risk perceived safe haven undercurrent that is
a tailwind supporting gold above where the macro factors otherwise would
put gold."
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Dark Clouds For Equities In Sept. May Be Silver Lining For
Gold, Silver Bulls
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Thursday, September 01, 2022
CNBC’s “Pro Playbook” email dispatch on Thursday said: “August was rough
for Wall Street, and September could be more of the same. Data compiled by
the Stock Trader’s Almanac shows September is on average the worst month
for stocks.
Since 1950, the S&P 500 has averaged a loss of 0.5% in September,
including a drop of 11.9% in 1974. The benchmark index has also posted
September losses in the last two years, dropping 4.8% in 2021 and 3.9% in
2020. This historically weak performance for the month, along with August’s
declines and expectations of even higher rates from the Federal Reserve and
other central banks, raise concern over a potential retest of the mid-June
lows” in the stock indexes.
The above scenario may be what puts in price bottoms for the gold and
silver markets. Gold hit a six-week low Thursday and silver a
more-than-two-year low.
The metals markets (hard assets) and the stock market (paper assets)
compete for trader and investor monies, and the turbulent months of
September and October for the stock and financial markets may be just what
the doctor ordered for the safe-haven gold and silver markets.
It can also be argued that the hawkish central banks and notions of weaker
global economic growth that are likely to crimp consumer and commercial
demand for metals, has now been factored into gold and silver prices.
Don’t be surprised if a “sell the rumor, buy the fact” scenario develops in
the gold and silver markets in the near term, regarding the bearish central
bank element for the metals.
Also, from a short-term technical perspective, the gold and silver markets
are oversold, technically, and due for corrective bounces very soon.
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