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Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters

Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters.

BY MARWA RASHAD

RIYADH, March 16 Sun Mar 16, 2014 7:58am EDT

(Reuters) – Saudi Arabia thinks that the Chinese yuan is a good option for diversifying foreign currency reserves but it is still far from being a reserve currency, its central bank governor Fahad al-Mubarak said on Sunday.

Asked whether it made sense to consider diversifying the central bank’s reserves to include the yuan, also known as the renminbi, or explore a currency swap agreement, Mubarak said: “We think it is a stronger currency, but it is far from being a reserve currency at this stage.”

“But indeed it represents a good option and a good diversifier and we have seen that some of the central banks have some reserves in the renminbi,” he said at an annual news conference in the Saudi capital.

Mubarak, who does not comment on policy outside of annual press briefings, did not say, however, whether the central bank had considered adding the yuan to its portfolio of net foreign assets. Its reserves, the vast majority of which are believed to be in U.S. dollars, grew to a record $718 billion in January.

A gradual easing of restrictions on the yuan and increasing trade with China have led some of Beijing’s partner countries include the renminbi in their official reserves and open currency swap agreements.

Last year, Taiwan’s central bank said it was holding the yuan in its foreign exchange reserves portfolio in recognition of the yuan’s growing globalisation and importance of trade, while Australia’s central bank unveiled a plan to invest some of its reserves in Chinese government bonds for the first time.

Among the Gulf Arab oil exporters, who mostly peg their currencies to the U.S. dollar, the United Arab Emirates signed a three-year currency swap agreement worth $5.5 billion with China in 2012 to boost two-way trade and investment.

Oil giant Saudi Arabia is the top crude supplier for China, the world’s second biggest economy. Last year, the Gulf monarchy supplied Beijing with around 1.17 million barrels per day of oil and is expected to deliver the same amount this year, according to traders.

Beijing has laid out plans to make the yuan convertible on the capital account, but its market interventions to hold back the pace of appreciation have shown a wariness of currency liberalisation.

Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters

Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters.

BY MARWA RASHAD

RIYADH, March 16 Sun Mar 16, 2014 7:58am EDT

(Reuters) – Saudi Arabia thinks that the Chinese yuan is a good option for diversifying foreign currency reserves but it is still far from being a reserve currency, its central bank governor Fahad al-Mubarak said on Sunday.

Asked whether it made sense to consider diversifying the central bank’s reserves to include the yuan, also known as the renminbi, or explore a currency swap agreement, Mubarak said: “We think it is a stronger currency, but it is far from being a reserve currency at this stage.”

“But indeed it represents a good option and a good diversifier and we have seen that some of the central banks have some reserves in the renminbi,” he said at an annual news conference in the Saudi capital.

Mubarak, who does not comment on policy outside of annual press briefings, did not say, however, whether the central bank had considered adding the yuan to its portfolio of net foreign assets. Its reserves, the vast majority of which are believed to be in U.S. dollars, grew to a record $718 billion in January.

A gradual easing of restrictions on the yuan and increasing trade with China have led some of Beijing’s partner countries include the renminbi in their official reserves and open currency swap agreements.

Last year, Taiwan’s central bank said it was holding the yuan in its foreign exchange reserves portfolio in recognition of the yuan’s growing globalisation and importance of trade, while Australia’s central bank unveiled a plan to invest some of its reserves in Chinese government bonds for the first time.

Among the Gulf Arab oil exporters, who mostly peg their currencies to the U.S. dollar, the United Arab Emirates signed a three-year currency swap agreement worth $5.5 billion with China in 2012 to boost two-way trade and investment.

Oil giant Saudi Arabia is the top crude supplier for China, the world’s second biggest economy. Last year, the Gulf monarchy supplied Beijing with around 1.17 million barrels per day of oil and is expected to deliver the same amount this year, according to traders.

Beijing has laid out plans to make the yuan convertible on the capital account, but its market interventions to hold back the pace of appreciation have shown a wariness of currency liberalisation.

China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge

China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge.

In the aftermath in the recent surge in China’s renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China’s “fight with speculators” (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn’t done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan’s trading band against the dollar from 1% to 2%.

The PBOC’s overnight release:

The healthy development of China’s current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People’s Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:

 

Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, “the People’s Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice “(Yin Fa [2010] No. 325) execution.

 

People’s Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.

Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: “There is no basis for big appreciation of the renminbi,” the PBOC said, noting that China’s trade surplus now represents only 2.1% of its gross domestic product. At the same time, “there is no basis for big depreciation of renminbi,” the central bank added, saying that risks in China’s financial system are “under control” and the country’s big foreign-exchange reserves can serve as a big buffer against any external shocks.

Alas, in China merely soothing words hardly ever do the job which is why “while pledging to give the market a bigger role in setting the yuan’s exchange rate, the PBOC said it would still implement “necessary adjustments” to prevent big, abnormal fluctuations in the yuan’s exchange rate.”

The macro thinking behind China’s move was foretold well in advance, but for those who missed it, the WSJ does a good recap:

the change, which followed Beijing’s landmark move in 2012 to double the yuan’s trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.

 

The exchange-rate reform is part of China’s plan to overhaul its creaky financial sector, elevate the country’s status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.

 

A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.

 

The move to widen the yuan’s trading range comes as China’s juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.

For some even the doubling in the rate band is not enough:

Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.

But perhaps the biggest message from today’s announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China’s reserves, which recently may or may not have been sod off in the form of US Treasurys.

Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.

 

That is because when the yuan’s floating range gets bigger, the yuan won’t touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan’s value.

 

As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.

 

“The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past,” said Christy Tan, a currency specialist at Bank of America Merrill Lynch.

One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.

* * *

Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.

UBS

 

  • The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
  • Action doesn’t have direct implications for direction of CNY against USD
  • UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
  • Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang

Morgan Stanley

  • “We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
  • Wider yuan band will help deter “carry trade speculators” as volatility increases
  • Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
  • Recent CNY depreciation created precondition for band widening

Commonwealth Bank of Australia

  • With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
  • Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
  • Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years

BEA

  • PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
  • Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
  • Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization

Bank of America

  • Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
  • PBOC wants to widen band when market view is more balanced
  • Not very surprising in terms of band-widening timing
  • Another band widening this year is unlikely
  • Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
  • Long-dated NDFs could weaken further, though not necessarily the daily official fixings
  • Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation

ANZ

  • With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
  • Yuan band widening didn’t come as a surprise
  • Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
  • Another widening won’t come so soon given the last move was 2 yrs ago in 2012

China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge

China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge.

In the aftermath in the recent surge in China’s renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China’s “fight with speculators” (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn’t done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan’s trading band against the dollar from 1% to 2%.

The PBOC’s overnight release:

The healthy development of China’s current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People’s Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:

 

Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, “the People’s Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice “(Yin Fa [2010] No. 325) execution.

 

People’s Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.

Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: “There is no basis for big appreciation of the renminbi,” the PBOC said, noting that China’s trade surplus now represents only 2.1% of its gross domestic product. At the same time, “there is no basis for big depreciation of renminbi,” the central bank added, saying that risks in China’s financial system are “under control” and the country’s big foreign-exchange reserves can serve as a big buffer against any external shocks.

Alas, in China merely soothing words hardly ever do the job which is why “while pledging to give the market a bigger role in setting the yuan’s exchange rate, the PBOC said it would still implement “necessary adjustments” to prevent big, abnormal fluctuations in the yuan’s exchange rate.”

The macro thinking behind China’s move was foretold well in advance, but for those who missed it, the WSJ does a good recap:

the change, which followed Beijing’s landmark move in 2012 to double the yuan’s trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.

 

The exchange-rate reform is part of China’s plan to overhaul its creaky financial sector, elevate the country’s status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.

 

A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.

 

The move to widen the yuan’s trading range comes as China’s juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.

For some even the doubling in the rate band is not enough:

Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.

But perhaps the biggest message from today’s announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China’s reserves, which recently may or may not have been sod off in the form of US Treasurys.

Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.

 

That is because when the yuan’s floating range gets bigger, the yuan won’t touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan’s value.

 

As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.

 

“The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past,” said Christy Tan, a currency specialist at Bank of America Merrill Lynch.

One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.

* * *

Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.

UBS

 

  • The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
  • Action doesn’t have direct implications for direction of CNY against USD
  • UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
  • Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang

Morgan Stanley

  • “We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
  • Wider yuan band will help deter “carry trade speculators” as volatility increases
  • Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
  • Recent CNY depreciation created precondition for band widening

Commonwealth Bank of Australia

  • With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
  • Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
  • Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years

BEA

  • PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
  • Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
  • Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization

Bank of America

  • Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
  • PBOC wants to widen band when market view is more balanced
  • Not very surprising in terms of band-widening timing
  • Another band widening this year is unlikely
  • Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
  • Long-dated NDFs could weaken further, though not necessarily the daily official fixings
  • Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation

ANZ

  • With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
  • Yuan band widening didn’t come as a surprise
  • Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
  • Another widening won’t come so soon given the last move was 2 yrs ago in 2012

The world is SCREAMING for a new financial system

The world is SCREAMING for a new financial system.

March 14, 2014
Ambergris Caye, Belize

One of the key lessons we can take away from history is that the global financial system changes… frequently.

In ancient times, Roman coins were used across the region by Romans and non-Romans alike who engaged in trade and commerce.

Given how destructively successive Roman governments debased their coins, however, the reserve burden eventually fell to the Byzantine Empire, whose gold solidus coin became the dominant currency in world trade.

Over the centuries, this standard changed several more times. The Venetians, Florentines, Spanish, French, British, etc. each issued the world’s dominant currency at one point or another.

But the fundamentals of those currencies changed. Governments engaged in wanton debasement, mismanaged their economies, and accumulated massive debt levels. And eventually the world shifted to new currencies.

Since the end of World War II, the US dollar has been the dominant currency in the world.

And even though Richard Nixon ended the dollar’s convertability to gold and unilaterally abandoned the US government’s obligations under the Bretton Woods system back in 1971, the world has still clung to the dollar for the past 43-years.

But this is changing rapidly.

The Chinese, which have their own economic issues to deal with, are starting to dump Treasuries in record numbers.

Central banks are buying up more gold. Foreign countries are entering into bilateral currency swap arrangements with one another. And world governments are starting to (rather embarrassingly) demand that the US get its budget and fiscal house in order.

Most tellingly, though, member nations of the International Monetary Fund are starting to revolt.

As one of the major organizations spawned from the post-war financial structure, the IMF’s original goal was to ensure the smooth development of a new global financial system.

Over 180 countries have since become members of the IMF. But the organization runs on a quota system, with each member nation having a certain percentage of the IMF’s overall votes.

The US, for example, has the most power by far with a 16.75% share of the vote. Japan is a distant second with a 6.23% share.

This puts the US in the driver’s seat. And it’s been that way for decades.

But most of the other 180+ nations have had enough. And they’re pushing the United States to massively overhaul the current quota system.

Even typical allies are breaking ranks. Australian Treasurer Joe Hockey recently told reporters at a financial conference that they will “actively lobby” the US to reform the IMF quota issues, and that “Congress must understand that it is in the interest of the US to reform the IMF. . .”

India. China. Just about everyone imaginable is pushing for major IMF reform. Everyone except the Land of the Free. The US government seems to like things the way they are. And Congress has been very intransigent in adopting any planned reforms.

These people have their heads buried in the sand so deep that they can’t even hear the rest of the world SCREAMING for a new financial system.

This is going to happen, whether the US wants it to or not.

And while no foreign government wants a collapse of the dollar, they do very much want an orderly rebalancing of the financial system. This is already under way.

The US government may pretend that everything is fine and dandy. But given the overwhelming objective evidence out there, folks who aren’t on board with this major trend are ignoring it at their own peril.

Deluded Currency Cultists Believe The Dollar Is Invincible

Deluded Currency Cultists Believe The Dollar Is Invincible.

Wednesday, 12 March 2014 05:25 Brandon Smith

At the onset of the derivatives collapse in 2007/2008 it would have been easy to assume that most of America was receiving a valuable education in normalcy bias.

In 2006, the amount of ego on display surrounding mortgage investment was so disturbingly grotesque anyone with any true understanding of the situation felt like projectile vomiting. To watch the smug righteousness of MSNBC and FOX economic pundits as they predicted the infinite rise of American property markets despite all evidence to the contrary was truly mind blowing. When the whole system imploded, it was difficult to know whether one should laugh, or cry.

The saddest aspect of the credit crisis of 2008 was not the massive chain reaction of bankruptcies or the threat of institutional insolvency. Rather, it was the delusional assumptions of the public that the grand mortgage casino was going to go on forever. There is nothing worse than witnessing the victim of a Ponzi scheme defend the lie which has ultimately destroyed him. As much as I am for people waking up to the nature of the crisis, there comes a point when those who are going to figure it out will figure it out, and the rest are essentially hopeless.

The cultism surrounding the U.S. economy and the U.S. dollar is truly mind boggling, and by “cultism” I mean a blind faith in the fiat currency mechanism that goes beyond all logic, reason and evidence.

In recent weeks it has become more visible as global financiers play both sides of the Ukrainian conflict, luring Americans into a frenzy of false patriotism and an anti-Russo-sports-team-mentality. My personal distaste for Vladimir Putin revolves around my understanding that he is just as much a puppet of the International Monetary Fund and international banks as Barack Obama, but many Americans hate him simply because the mainstream media has designated him the next villain in the fantasy tale of U.S. foreign policy.

Open threats from Russia that they will dump U.S. treasury bond holdings and the dollar’s world reserve status if NATO interferes in the Ukraine have been met with wildly naive chest beating from dollar cultists.  I am beginning to see the talking points everywhere.

“Let them dump the dollar, Russia’s holdings are minimal!” Or, “Let them throw out Treasuries, they’ll just be shooting themselves in the foot!” are the battle cries heard across the web. I wish I could convey how insane this viewpoint is, especially in light of the fact that many alternative economic analysts, including myself, have been predicting just such a scenario for years.

Despite the childish boastings of the dollar devout, there is an extraordinarily good possibility that the life of the greenback will be snuffed out in the near term. Here are the facts…

1) Russia will not be alone in its decouple from the dollar system. China, our largest foreign creditor, and India (a supposed ally) have clearly sided with Russia on the Ukranian issue. China has stated that it will back Russia’s play in the event that sanctions are brought to bear by NATO, or if a shooting conflict erupts.

2) China has already been slowly dumping the dollar as a world reserve currency using bilateral trade agreements with numerous countries, including Russia, India, Australia, Brazil, Germany, Japan, etc. These agreements allow FOREX currency swaps and export/import purchases to be made with China without the use of the dollar. China has been preparing itself for a divorce from U.S. economic dependence for at least a decade. The idea that they would actually follow through over political tensions should NOT surprise anyone if they have been paying attention.

3) A total drop of the dollar or U.S. treasury bonds by Russia and China would send shock waves through global markets. Russia is a major energy supplier for most of Europe. China is the largest export/import nation in the world. If they refuse to accept dollars as a trade mechanism, numerous countries will fall in line to abandon the greenback as well. The fact that so many Americans refuse to acknowledge this reality is a recipe for disaster.

The only advantage the U.S. has traditionally offered in terms of international trade has been the American consumer, whose unchecked debt spending partly fueled the rise of the industrialized East, not to mention the biggest credit bubble in history. The role of America as a consumer market is collapsing today, however. The mainstream media and the Federal Reserve can blame the steady decline in retail sales on the “weather” all they want, but negative indicators in global manufacturing often take many months to register in the statistics, meaning, this destabilization began long before the days turned cold.

4) China has been shifting away from export dependency since at least 2008, calling for a larger consumer based market at home. This process of enriching the Chinese consumer has almost been completed. The lie that China “needs the U.S.” in order to survive economically needs to be thrown out like the utter propaganda it is.

5) China (and most of the world) has ended new dollar purchases for their FOREX reserves, and has no plans to make new purchases in the future.

6) China executed the second largest dump of U.S. Treasury bonds in history in the past month.

7) Russia, China, and numerous other countries, including U.S. “allies”, have been calling for the end of the dollar’s world reserve status and the institution of a new global basket currencyusing the IMF’s Special Drawing Rights (SDR). Even Putin has suggested that the IMF take over administration of the global economy and issue the SDR as a world currency system. This flies in the face of those who argue that the IMF is somehow “American run”. The truth is, the IMF is run by global banks and no more answers to the U.S. government than the Federal Reserve answers to the U.S. government.

 

8) The Federal Reserve has been creating trillions of dollars in fiat just to prop up U.S. markets since 2008, and we are still seeing a considerable decline in global manufacturing, retail, personal home sales, and a general malaise in consumer demand. Without a full audit, there is no way to know exactly how much currency has been generated or how much is floating around in foreign markets. Any loss of world reserve status would send that flood of dollars back into the U.S., most likely ending in a hyperinflationary environment.

9) Another rather dubious argument I see often is the claim that the Federal Reserve and the U.S. Treasury could simply “negate” a Treasury dump by refusing to acknowledge creditor liabilities. Or, that they could simply print what they need to snap up the bonds, much like the German government tried to do during the Weimar collapse. Unfortunately, this plan did not work out so well for the Germans, nor has it worked for any other nation in history, so I’m not sure why people think the U.S. could pull it off. However, this is the kind of cultism we are surrounded by. These folks think the U.S. economy and the dollar are untouchable.

Yes, the Fed and the Treasury could hypothetically erase existing liabilities, but what dollar cultists do not seem to grasp is that the dollar’s value is not built on Treasury purchases. The dollar’s value is built on faith and reputation. If a nation refuses to pay out on its debts, this is called default. A default by the U.S. would immediately damage the reputation of bonds and dollars as a good investment. Global markets will refuse to purchase or hold any mechanism that they think will not earn them a profit. How many investors today are anxious to jump into Greek treasury bonds, for instance?

Finally, it is unwise to operate on the assumption that foreign creditors will accept dollars as payment on U.S. Treasury bonds if they believe the Federal Reserve is monetizing the debt. When Weimar imploded under the weight of currency devaluation, many foreign governments refused to accept the German mark as payment. Instead, they demanded payment in raw commodities, like coal, lumber and ore. Expect that China and other debt holders will demand payment in U.S. goods, infrastructure, or perhaps even land.

10) Most treasury holdings in foreign coffers are not long term bonds. Rather, they are short term bonds which mature in weeks or months, instead of years. Dollar proponents constantly cite the continued accumulation of treasury bonds by other governments as a sign that the dollar is still desirable as ever. Unfortunately, they have failed to look at the nature of these bond purchases. When China rolls over millions in short term bonds and replaces them with other short term bonds, this does not suggest they have much faith in America’s long term ability to service its debt. It would also make sense that if China had plans to remove itself from the dollar system, they would move into short term bonds which can be liquidated quickly.

11) China is on the fast track to becoming the largest holder of physical gold in the world. Russia has also greatly expanded its gold purchases. Whatever losses they might suffer from a dump of their Treasury bond investments; it will be more than made up in the incredible explosion in precious metals prices that would follow.

12) The most common argument against the dollar losing world reserve status has been that such a shift would be “impossible” because no other currency in the world has the adequate liquidity needed to replace the dollar in global trade. These people have apparently not been paying attention to the Chinese yuan. China has been quietly issuing trillions in yuan denominated bonds, securities and currency around the world. Current estimates calculate around $24 trillion created by the PBOC and the banks under its control.

Mainstream talking heads are calling this a “debt bubble.” However, this debt creation makes perfect sense if China’s plan is to create enough liquidity in its currency in order to offer a viable alternative to the U.S. dollar. Linking the yuan to the IMF’s basket currency would complete the picture, forming a perfect dollar replacement while dollar cheerleading-economists stand dumbstruck.

13) China’s retreat away from dollar denominated investments has left a hole in the U.S. bond market.  Recently, that negative space was filled by an unexpected source; namely Belgium.  A country whose GDP represents less than 1% of total global GDP buying more U.S. bonds than China?  The whole concept sounds bizarre.  Where is the capital coming from?

Think about it this way – Belgium is the political center of the European Union and a haven for international financiers.  There are more corporate cronies, lobbyists, bureaucrats, and foreign dignitaries in Belgium than in all of Washington D.C.  But more importantly, Belgium struck a deal with the IMF in 2012 to begin pumping SDR denominated funds into “low income economies”.  I would suggest that this funding flows both ways, and that now, the IMF is feeding capital into Belgium in order to buy U.S. Treasury Bonds.  That is to say, the IMF is going to start using smaller member countries with limited savings as proxies to purchase U.S. debt using IMF money.

The ultimate danger of the IMF (run by internationalists, not the U.S. government) pre-positioning itself as the primary buyer of U.S. debt is that when the U.S. finally defaults (and it will), the IMF is likely to become the “guardian angel” of the U.S. economy, offering aid in exchange for total administrative control of our financial system, and the institution of the SDR as a world reserve replacement for the dollar.

14) The serious prospect of regional conflict or world war over tensions between the Ukraine and Russia, Japan and China, the U.S. and Syria, the U.S. and Iran, the U.S. and North Korea, etc., could make the effort of exposing the plan to shift economic power into a one world system centralized under the IMF almost meaningless.  How many people will truly care about the financial power grab by banking elites if it drifts under the surface of catastrophic engineered wars?  They’ll be too busy hating and fighting artificially created boogeymen to pay attention to the real globalist culprits.

I have been pointing out for quite a long time that globalists need a “cover event”; a disaster, an economic war or a shooting war, in order to provide a smokescreen for the collapse of the dollar. Alternative analysts have been consistently correct in predicting the trend towards the dump of the dollar. Years ago, we were laughed at for suggesting China would shift towards a consumer based economy and away from U.S. dependence. Today, it is mainstream news. We were laughed at for suggesting that nations like Russia and China would drop the dollar as a reserve currency. Today, they are already in the process of doing it. And, we were laughed at for suggesting that Russia or China would use their debt holdings as leverage against the U.S. in the event of a geopolitical conflict. Today, they are openly making threats.

I have to say, I’ve grown tired of the dollar cultists. How many times can a group of people be wrong and still argue with those who have been consistently right? The answer is that zealots never actually escape their own delusions, even when their delusions lead them and those around them to ruin. I suspect that in the face of complete dollar collapse, they will still be rationalizing the chaos and pontificating on our “lack of understanding” while the theater burns down around them.

“No inflation” Friday: the dollar has lost 83.3% against…

“No inflation” Friday: the dollar has lost 83.3% against….

No inflation?

March 7, 2014
Dallas, Texas

I needed a caffeine jolt late this morning after the long journey up from South America.

And while I’m generally averse to aspartame, high fructose corn syrup, and other government-sanctioned poisons, I did briefly consider a hit of Coca Cola as I walked past a vending machine on my way out of a grocery store.

Then I saw the price.

To give you some quick background, this was the same grocery store my mother used to shop at when I was a kid. And if I was really lucky, we’d stop for a can of coke on the way out– 25 cents back then.

Fast forward to today–. I’m a grown man of 35 now instead of a 9-year old kid. And while the store has changed hands a few times, there’s still vending machine near the entrance.

Same coke, same 12 ounces (though now in a plastic bottle instead of an aluminium can).

Price today? $1.50. [note, this is the vending machine price, not grocery store price.]

Put another way, $1 would have bought me 48 ounces of Coca Cola 26 years ago. Today that same dollar buys me just 8 ounces.

This means that the dollar has lost 83.3% of its value against Coca Cola over the past three decades, averaging roughly 6.6% inflation per year.

Some readers may remember the price of Coca Cola being just 5c back in the early 1950s (for a 6.5oz glass)… meaning the US dollar has lost 93.8% against Coca Cola over the past six decades.

Now, we are taught from the time we are children that ‘a little inflation is good…’

And when central bankers tell us they’re targeting an inflation rate of 2% to 3%, that certainly doesn’t seem so bad. 2% is practically just a rounding error. But bear in mind a few things–

1) An inflation rate of 2% is not price stability.

As Jim Rickards frequently points out, even with just 2% inflation, a currency loses over 75% of its value during an average lifespan. This can hardly be considered monetary stablilty.

And this practice of gradually plundering people’s purchasing power over time is incredibly deceitful.

2) Even if, they rarely meet their target.

As this case shows, 6.6% certainly ain’t 2%. The official statistics and research papers may say 2%. Reality is much different.

3) Wages often don’t keep up.

According to the US Labor Department, the median weekly wage back in 1988 was $382… or roughly 18,336 ounces of Coca Cola.

Today the median weekly wage is $831.40… or just 6,651.20 ounces.

So as measured in Coca Cola, the average wage in the Land of the Free has declined by 11,684 ounces per week– a 63.7% decline over the last three decades.

You can make a similar calculation denominated in Snickers bars, gallons of gas, etc.

If you have a big picture, long-term view, it’s clear that standard of living is falling.

Some readers may remember decades ago– a single parent could go out and, even with a blue collar job, comfortably support a growing family.

Today, dual income households struggle to keep their heads above water. This is the long-term plunder of inflation.

And just to give you a reminder of what things used to cost, I’ve pulled a page from the March 7, 1988 edition of the Bryan Times of Bryan, OH: 26-years ago today.

inflation federal reserve No inflation Friday: the dollar has lost 83.3% against...

You can scroll through the paper and note the prices:

25c for a dozen eggs. 69c for a loaf of bread. 49c for a pound of Chicken. A brand new Mustang LX for just $9203.

That’s the Federal Reserve for you. 100 years of monetary destruction and counting.

Yuan to supersede dollar as top reserve currency: survey

Yuan to supersede dollar as top reserve currency: survey.

 Published: Wednesday, 26 Feb 2014 | 10:29 PM ET
By:  | Writer, CNBC Asia

The tightly controlled Chinese yuan will eventually supersede the dollar as the top international reserve currency, according to a new poll of institutional investors.

The survey of 200 institutional investors – 100 headquartered in mainland China and 100 outside of it – published by State Street and the Economist Intelligence Unit on Thursday found 53 percent of investors think the renminbi will surpass the U.S. dollar as the world’s major reserve currency.

Optimism was higher within China, where 62 percent said they saw a redback world on the horizon, compared with 43 percent outside China.

Hudiemm | E+ | Getty Images

“As China’s economic influence grows, the global importance of the renminbi will become magnified. Indeed, while for decades it has been a ‘greenback world’, dominated by the U.S. dollar as the world’s primary reserve currency, many think a ‘redback world’, in which the renminbi enjoys premier status, is increasingly a possibility,” the report accompanying the survey said.

(Read moreYuan takesanother step forward as a world currency)

This view was shared by European Central Bank Executive Board member Yves Mersch, who said on Wednesday that China’s yuan is gaining importance in international trade and investment and might ultimately challenge the U.S. dollar.

However, skeptics of yuan internationalization argued that the renminbi will never be liquid enough across all asset classes to serve as a viable reserve currency, and that people will not trust the renminbi as a store of value.

Despite being a closely-managed currency, the renminbi’s global clout has been rising steadily. By the end of 2013, the renminbi had become the second most used trade financing currency and ninth most used currency for payments globally.

(Read moreYuan overtakes euro as 2nd most used currency in trade finance)

Recent moves in the yuan have triggered speculation that the People’s Bank of China is getting ready to widen its trading band – which would be a step towards liberalizing the Chinese currency. The yuan is currently allowed to rise or fall by 1 percent in either direction from a level fixed against the dollar each day by the country’s central bank.

Ultimately, a greater role for the yuan would require China to liberalize its financial policies, including decreasing exchange-rate intervention, liberalizing interest rates and relaxing restrictions on capital flows.

Play Video
PBOC is the ‘market’ behind yuan: Julius Baer
Mark Matthews, Head of Research Asia at Bank Julius Baer, says recent weakness in the Chinese yuan could be a move executed by the Chinese central bank to shake out speculators.

Two-thirds of the respondents of the survey expect Beijing to complete its financial liberalization within ten years, with a majority expecting major reforms within five.

(Read moreIs China getting ready to widen the yuan’s band?)

Financial liberalization in the mainland began in earnest after 2009, with the government’s decision to allow cross-border trade settlement in renminbi, ease the process of listing offshore bonds and introduce the renminbi qualified institutional investors (RQFII) program.

The reforms, however, are still limited in scope, with strict quotas for how much currency can move across the border.

Last year, the government launched the Shanghai free-trade zone as a testing ground for financial reforms, including full yuan convertibility.

—By CNBC’s Ansuya Harjani. Follow her on Twitter @Ansuya_H

Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years) | Zero Hedge

Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years) | Zero Hedge.

The last 7 days have seen the unstoppable ‘sure-thing’ one-way bet of the decade appreciation trend of the Chinese Yuan reverse. In fact, the 0.95% sell-off is the largest since 1994 (bigger than the post-Lehman move) suggesting there is clear evidence that the PBOC is intervening.

 

The fact that this is occurring with relatively stable liquidity rates (short-term repo remains low) further strengthens the case that China just entered the currency wars per se as SocGen notes, intending to discourage arbitrage inflows. For the Chinese authorities, who do not care about the level of their stock market (since ownership is so low), and specifically want to tame a real-estate bubble, thisintentional weakening is clearly aimed at trade – exports (and maintaining growth) as they transition through their reforms. The question is, what happens when the sure-thing carry-trade goes away?

BofA notes the puzzling divergence between Yuan fixings and short-term liquidity,

The turn of the Chinese New Year brought the People’s Bank of China (PBoC) back into action – it not only restarted repo operations to withdraw liquidity, it actually did it at a much higher rate. The 7d reverse repo rate at which the PBoC injects liquidity is 75bp higher than a year ago, a move considered by the market as a 75bp rate hike over the last year. The new 14d repo (liquidity withdrawal) rate is set at 3.8%, 105bp higher than the rate when 28d repo was last conducted on 6 June 2013. Based on a simple framework, this move is equivalent to another 35bp rate hike (Rate corridor, Chinese style, 18 February 2014).

The puzzle is that both money and bond markets nearly totally ignored such an operation. The 7d repo rate is now fixed nearly 200bp lower since 10 February. Such a massive liquidity improvement in the face of the PBoC’s liquidity withdrawal is puzzling, since by 10 February most of the cash used during Chinese New Year should have flowed back into the financial system already.

The FX market move also begs the question as to why liquidity improved over the last couple of weeks. Generally, the onshore repo rate rises as the RMB weakens against fixing; a normal development because FX outflow dries up liquidity. However, the move in February turned things upside down. Look at the sharp divergence between rates and FX

Which leaves 2 possible reasons for the divergence

It is due to the seasonality of outflows, as this year could be made worse because the onshore rate was much higher before the Chinese New Year. As a result, banks might have borrowed more offshore, helping the RMB to appreciate. After the New Year, this flow reverses and pushes the RMB down. This explains why the CNY leads the CNH in spot selloff. It is also consistent with the large January FX purchase position of CNY466bn. The trouble with this explanation is that as the money flows out, the onshore rate should rise, not drop.

A more popular theory or suspicion puts the PBoC behind the move. As the PBoC buys more USD, it creates natural liquidity in the CNY, leading to much lower repo rates. This explanation is consistent with CNY leading the move, as CNY and CNH spots moved much more than forward, all suggesting a domestic investor-driven rather than foreign investor-driven endeavor. The trouble with this explanation is that the market will have difficulty proving it one way or the other without the central bank explicitly admitting it.

As SocGen notes, the latter makes more sense…

In just short seven days, the once unstoppable appreciation trend of the yuan is reversed. The USD/CNY spot has depreciated by 0.8% since 17 February and the USD/CNH has weakened by more than 1.1%. As for the causes, there is clear evidence of intervention from the People’s Bank of China. We think that the recent yuan move is intended to discourage arbitrage inflows. If short-term capital inflows abate, the depreciation will probably halt.

Ending the inexorable carry trade…

The yuan appreciated by nearly 3% against the greenback and 7% against in nominal effective exchange rate terms in 2013. Over the same period, China’s FX reserves added another $500bn, despite the repeated talk from officials that China has had enough reserves. These seemingly contradictory messages and signs, in our view, suggest that the PBoC never really wants too much yuan appreciation, especially if it is driven by short-term speculative capital inflows.

Which is crucial…

The yuan possesses the very two qualities of a carry trade currency: high onshore interest rates and a gradual but steady appreciation trend. The first quality is partly caused by the Fed’s easing policy and partly by the PBoC’s reluctance to ease domestic liquidity conditions out of concerns over debt risk. This condition is unlikely to weaken significantly in the near term. However, the PBoC is capable of altering the second condition and it seems that it is doing exactly so by reversing the appreciation trend and pushing up the volatility of the yuan.

If we are right about the reason behind the surprising deprecation of the yuan, what will follow next?

– Band-widening? Maybe, but as we have argued before, what matters is how the PBoC manages the currency. To make real difference, we think that the next step in yuan reform should be bolder: the PBoC should move from daily to weekly (or even monthly) setting of the reference rate, while at the same time widening the currency band.

– More depreciation? Probably not much more. Although the central bank does not like too much capital inflows, too much outflows will not be its choice either. The monthly FX position data are something to track for any change in the capital flow direction. A timelier indicator is the spread between CNH and CNY spot rate. If the offshore rate stays persistently weaker than the onshore one by a certain margin, that will be a sign of capital outflows. Then the PBoC will most likely choose to stabilise the yuan again.

The end-result is a concern:

Should the RMB weakening last a while longer, the cross border carry arbitrage flow which has been massive could reverse and lead to higher repo rates. Such a flattening force is a real threat, especially when the PBoC has shown no sign of lowering the repo rates in its operations.

But this certainly will not please the Japanese (trying to devalue and manufacture their own recovery) or any other beggar thy neighbor nation. Welcome to the Currency Wars China… (and we warned here, prepare for more carry unwind and a potential risk flare).

Potential asset deflation is a risk, as the carry trades diminish/unwind. Property prices are at risk – the collateral value for China’s financial systems. This is not a dire projection – it simply seeks to isolate the US QE as a key driver of China’s monetary policy and asset inflation, and highlights the magnitudes involved, and the transmission mechanism. Investors should not imbue stock-price movements and property price inflation in China with too much local flavor – this is mainly a US QE-driven story, in our view.

And lastly, as a bonus chart, we thought the correlation here was interesting…

Average:

Goodbye Dollar, Hello Yuan – FinancialJuice – Live News. Live Discussion.

Goodbye Dollar, Hello Yuan – FinancialJuice – Live News. Live Discussion..

Goodbye Dollar, Hello Yuan


You know what’s it like, the driver stands there in front of the car that has just hit you up the back while looking at something happening down the street rather than checking on you hitting your breaks…and yet, he says “sorry, but you stopped too quickly, it wasn’t my bad driving”. Why is it that people just refuse to admit the truth even where it comes up and slaps them in the face? It’s exactly the same with the Death of the Dollar. Denial is the first stage in the mourning process that people go through when they have lost a loved one. Yes, just the mere fact that there is many an American out there who is actually denying this means that the Dollar is lying feet up on its back, six feet under already today. They are simply, in denying the fact, espousing the 7 stages of bereavement. The Dollar is dead. Today it’s Australia that will be sending flowers to the Americans.

ASX, the Australian Stock-Exchange operator and the Bank of China announced today that they are going to provide a Yuan settlement service between the two countries by the end of the first half-year 2014. China represents the biggest trading partner for the Australian market and trading in Dollars has no sense today. Transactions have been increasingly made in Yuan rather than the Dollar over the past few years. This new agreement comes just after last October’s agreement between the Eurozone and China and the currency-swap deal.

For all of those out there that will be screaming from the rooftops that China is slowing down, that the economy is under-performing (incidentally, they are still performing way better than any of us in the western world) the Chinese currency is one of the top traded currencies today in the world, and Australia has just said they don’t care if the economy is slowing down. The reason why the deal has been struck is because they are looking at China in the long-term view.

Since September 2013, the Yuan has been in the top ten of tradable currencies, according to research carried out by the Bank of International Settlements. The Yuan saw a jump from 17th position in 2010 to 9th place in 2013. There may be a slow-down in the economy and there may be problems with the structural reforms undertaken by the government, but in the long-term the Yuan will be traded more and more. The Australians are proving that today.

The financial market reforms have been centered on liberalization of the capital account and the convertibility of the Yuan. The only countries that offer complete convertibility at the moment are the USA, Japan and Australia.

Certainly the shadow-banking problems are far from over. There will be more that come out of the woodwork in the coming weeks. It is estimated that 40% of the 10 trillion Yuan in trust products that are used in shadow banking will mature in 2014. That means that we could be in for a lot more examples of the $126 million-worth of products issued by Jilin Province Trust that defaulted on the repayment to investors over the past couple of weeks after having made loans to the failing coal company Shanxi Liansheng Energy (at the same time as 6 other trusts also made loans of up to 5 billion Yuan to this company that was already bankrupt and dead). 80% of trust-product principal is going to be repaid to investors between 2014 and 2016. That could spell trouble.

Bailing out trust investors continually will bring about problems of financial stability of the country. But, in the long-term there is the belief that the Yuan will succeed. All of that is true, but the Dollar may well be dead completely, and buried, before the Yuan fails.
In the process of acceptance of bereavement, the next stage after denial will be anger. Then the US will enter the period of bargaining with the rest of the world to try to save its place somehow on the international scene. Once it has been through the penultimate stage of depression (oh, no! Not again!), it will finally accept. But, for the moment, they shall just keep on denying lock, stock and barrel. The rest of the world, like the Australians, are seeing to it that the Dollar dies a quicker death than it would perhaps have normally done.

Remember it’s not the value of the Dollar that is important or whether or not the Yuan can be a valued asset in the world to trade with, it’s the perception that we, as consumers and countries, actually have of that currency. The Australians are showing that the Yuan has just been perceived as possibly of greater value than the Dollar.

Tissue to dry your eyes?

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