Thread: Is China's Renminbi Already The New World Reserve Currency?

Is China's Renminbi Already The New World Reserve Currency?

Currencies / Fiat Currency
Nov 10, 2010 - 04:00 AM

By: Global_Research

Tyler Durden writes: With the dollar tumbling overnight, many were scratching their heads as to what caused the move in the dollar. Citi's Stephen Englander provides a useful explanation, which fits perfectly with the commentary from PBoC advisor Li's earlier that the dollar's position as a reserve currency is now "absurd": namely that more and more in the world are starting to look at the CNY as the new reserve currency. And as we pointed out earlier, its fixing surge of over 0.5% overnight caused many to blink. Is China finally pushing to aggressively force the dollar out?

From Steve Englander's note today:

Why CNY?

We have cited but not explained the phenomenon of CNY leading G10 currencies. That was very clear overnight with the sharp downward move in USDCNY very clearly leading the move in EUR and AUD (and equity markets for that matter.) Investors appear to be viewing CNY gains as broadly bearish USD and bullish risk. The response to CNY can be partially explained if we assume that investors see CNY as setting the effective limit for how much other currencies can appreciate. It is less clear why global risk should be driven by CNY, except if investors see more global cooperation as a positive signal.



To be sure, Englander has had it in for the dollar for a long-time. He follows up in his note that in his view the USD sell signal has been triggered. While we don't disagree, we ask - what will said reserve managers buy: EURs? GBPs? JPYs? After all, all of them are just as bad. Oh wait, gold?

Reserve Manager USD sell signal triggered

Last week we published our analysis of reserve manager behaviour and presented a trading rule based on the following conditions:

1) The USD fell in the prior calendar month;
2) The (currency valuation adjusted) increase in reserves in our subset of reserve managers is positive; and
3) Higher than in the previous month

Our subset of reserve managers consists of a sample of reserve managers who report reserves soon after month end. We adjust nominal reserve accumulation to remove currency valuation effects. For proprietary reasons, we do not disclose the reserve managers in our subset (all data is publicly available on Bloomberg) and we only use the subset aggregate in our analysis.

If conditions 1 through 3 are met, the rule says buy EUR/USD on the seventh business day of the month (by which time the early reporting central banks in our sample will have reported their reserve levels), and hold the short USD position through the seventh day of the next month.

These conditions were met in November with valuation adjusted reserves in our sub-sample growing by 1%, and the dollar having dropped sharply in October.

The intuition is that we think that reserve managers are a latent USD selling force because of the size of their portfolios and concentrated holdings of USD. The immediate response is likely to be aggressive efforts to avoid being left holding an ever expanding USD bag.

zerohedge.com

http://www.marketoracle.co.uk/Article24170.html

Fed Accelerating Cycles of Money Pritning Without Exit Strategy

Interest-Rates / Quantitative Easing
Nov 09, 2010 - 12:29 PM

By: Peter_Schiff

While it's true that history repeats itself, the patterns should always be separated by a generation or two to keep things respectable. Unfortunately, in today's economic world, it seems the cycle can be counted in months.

On July 24, 2009, just as the Federal Reserve unleashed its first quantitative easing campaign (now called "QE1" - an echo of the reclassification of the Great War after still more destructive subsequent developments), Fed Chairman Ben Bernanke wrote an opinion piece in the Wall Street Journal to soothe growing concerns about excess liquidity. He assured the public that the Fed had an "exit strategy."

In a response entitled "No Exit for Ben", I called the Chairman's bluff. I argued that the Fed had no exit strategy, and that Bernanke was trying to fool the market into believing that quantitative easing was not debt monetization.

Just 16 months later, Bernanke is at it again, penning another op-ed to defend his second round of QE. Except this time, instead of feigning an exit strategy, he just outlines a path to expand the program in perpetuity.

In recent months, Fed economists have taken great pains to tell us how much better off the economy is now than it was in the first half of 2009. Given this supposed good news, what prompted the current turnaround in policy? Could it be, perhaps, that perpetual easing was the policy all along?

Should we expect another op-ed in a few months in which Bernanke tries to reassure us that QE3 will not over-liquefy the market? How much longer can the Fed play this game before the public and the markets wise up?

The reason I knew QE1 would fail, and that the Fed had no exit strategy (other than more rounds of easing), is because the remedy is totally flawed. If Bernanke's predecessor, Alan Greenspan, had engaged in prudent monetary policy, we never would have arrived at the point of desperation that made quantitative easing a palatable option. However, we did, and Bernanke's understanding of economics is so remedial that making the right choice is essentially impossible for him. Now, we are caught in a vicious circle of spending, borrowing, and easing.

In his most recent op-ed, Bernanke rather envisions a "virtuous circle" in which QE2 causes stock prices to rise, which then "boost[s] consumer wealth, and increase[s] confidence." The wealth effect, in turn, "spur[s] spending and produce[s] higher incomes and profits," which finally "support[s] economic expansion and promote[s] increased employment."

Despite the devastation of the Fed's previous burst bubbles (stocks in '99 and real estate in '0, Bernanke still believes in the virtue of pumping. His current policy is to inflate another stock market bubble to cure the recession that resulted from the bursting of the housing bubble, which was itself inflated to counter the effects of the bursting tech stock bubble. Does the story of the old lady who swallowed the fly come to mind? She eventually tried swallowing a horse, and we know how that ended. It's hard to decide who is more culpable for the strategy: Bernanke for selling it or the country for buying it.

In the 16 months since Bernanke assured us that QE1 would not jeopardize price stability, oats prices are up 40%, concentrated orange juice up 45%, gold and rice up 50%, corn up 55%, coffee up 60%, copper up 70%, sugar up 90%, and cotton and silver up 100%! (The sluggish Dow Jones Industrials are "only" up 30%.)

Last week, Kraft Foods reported a 26% rise in third quarter revenue; however, because of steeply rising material costs, profits actually dropped 8.5% over the same period. If Bernanke is correct in assuming that consumer prices will stay low, the only way Kraft shares could go up would be for the market to assign much higher multiples to lower earnings. You can hope that will happen, but it's not a wise bet.

Given that QE2 will also push down the dollar against foreign currencies, companies exporting to the US will face the same bind as Kraft. If foreign suppliers don't raise prices, a weaker dollar will cut into their profits.

My guess is that neither foreign nor domestic companies will take the hit, but pass the costs along to consumers. Rising prices will soon became a daily occurrence on Main Street, not just in the stock market.

For all the wrangling over extending the Bush tax cuts, no one seems bothered by the continuation of the Bernanke tax increases. For the typical American wage earner, the inflation tax will more than offset the benefits of slightly lower income taxes. Savers and retirees will suffer the most as the interest paid on their assets continues to fall and the purchasing power of their principal is eroded.

In reality, quantitative easing will produce the exact opposite of its intended result. In the short-run, it may create the illusion of economic growth and temporarily add some service sector jobs, but once the QE ends, the growth and jobs will vanish. Then, the Fed will most likely try once again to douse the fire it started with another round of QE gasoline, creating an even larger and less manageable inferno. Let's hope we can change policy before the whole economy burns to a cinder.

Click here for a description of Peter Schiff's best-selling, just-released book, How an Economy Grows and Why It Crashes.

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

http://www.marketoracle.co.uk/Article24154.html