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Is China's Renminbi Already The New Reserve Currency?

Tyler Durden's picture




 

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.

 

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Tue, 11/09/2010 - 10:59 | 711621 lolmao500
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Doom! Yay!

Tue, 11/09/2010 - 11:01 | 711628 doomandbloom
doomandbloom's picture

yes..did you call me?

Tue, 11/09/2010 - 11:05 | 711639 SWRichmond
SWRichmond's picture

My "Armageddon" portfolio is green across the board...

Tue, 11/09/2010 - 11:07 | 711647 unum mountaineer
unum mountaineer's picture

green = go

Tue, 11/09/2010 - 11:16 | 711680 SheepDog-One
SheepDog-One's picture

I hear that! Piles of ammo, silver, etc...all going as planned.

Tue, 11/09/2010 - 11:24 | 711705 RobD
RobD's picture

I've been meaning to pick up some more large pistol primers, I think today would be good a good day, if the have any.

Tue, 11/09/2010 - 22:26 | 714709 SWRichmond
SWRichmond's picture

primers are back on the shelves, even match primers.

Tue, 11/09/2010 - 11:00 | 711622 Slash
Slash's picture

are big traders still loading up on usd longs in the COT? I don't understand why that's happening....

Tue, 11/09/2010 - 11:07 | 711650 Charley
Charley's picture

It is happening because the USD cannot be devalued. Its role as world reserve currency means that every increase in the dollar price of goods requires other countries to hold a still greater quantity of dollars. No one accepts Senegal's CFA Franc for oil...

The US can create domestic inflation without an offsetting fall in the exchange rate of the dollar. It simply creates inflation for every currency instead. It is also for this reason that the trade deficit will not go away, no matter how much QE is undertaken.

Tue, 11/09/2010 - 11:00 | 711625 Fish Gone Bad
Fish Gone Bad's picture

The king is dead.   Long live the king.

Tue, 11/09/2010 - 11:00 | 711626 IrishSamurai
IrishSamurai's picture

If so ... here's your black swan for the U.S. equity markets ...

Tue, 11/09/2010 - 11:03 | 711634 101 years and c...
101 years and counting's picture

Is it just me, or does this market action this AM look like something bad is coming? 

Tue, 11/09/2010 - 11:04 | 711635 Charley
Charley's picture

Only if you are on drugs...then there are black swans everywhere...I prefer pink elephants myself

Tue, 11/09/2010 - 11:04 | 711637 lolmao500
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And since when equity market traders read Citi's advisor? Citi is a joke.

Tue, 11/09/2010 - 11:03 | 711632 Turd Ferguson
Turd Ferguson's picture

Big G20 hoedown this weekend, too.

Tue, 11/09/2010 - 11:16 | 711679 DaveyJones
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I love it when you say "whore" with an accent 

Tue, 11/09/2010 - 11:03 | 711633 Charley
Charley's picture

When the US starts using the RMB to buy Chinese output, then it will be a reserve currency. Until then, this is just nonsense. China is not ready or willing to print RMBs in quantities sufficient to support global trade. This guy is an idiot.

Tue, 11/09/2010 - 11:09 | 711655 Crisismode
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I tend to agree with your rationale. However, I'll reserve judgement on his mental state at this time.

Tue, 11/09/2010 - 11:06 | 711641 37FullHedge
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Just bought China today it looks a no brainer over the longterm.

For me over a decade or so The Chinas Yuan should be par to the US Dollar That looks like an inflation hedge and the stockmarket growth, Thats a bonus.

Tue, 11/09/2010 - 11:06 | 711642 buchesky
buchesky's picture

What the hell happened with VXX from yesterday to today?  Up over 200%  Does anyone have any idea???

Tue, 11/09/2010 - 11:08 | 711651 juangrande
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4 to 1 consolidation

Tue, 11/09/2010 - 11:12 | 711667 buchesky
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Bizarre.  My trading account shows the higher price, but same number of shares as does Google Finance.

Tue, 11/09/2010 - 11:22 | 711700 hettygreen
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Reverse stock splits = lower prices coming. I see this showing up in a lot of inverse ETFs and now an index that measures volatility and I can only conclude that asset prices are going much higher.

Tue, 11/09/2010 - 11:10 | 711662 Boston
Boston's picture

one for four reverse split

Tue, 11/09/2010 - 12:42 | 712006 Thunder Dome
Thunder Dome's picture

Reverse split cause stock is piece of shit.  Investors get fleeced on constant rolling of short-term position.  If I wanna go long VIX I short XXV instead of buying VXX.

Tue, 11/09/2010 - 11:11 | 711666 LoneStarHog
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But...but...Douchenger is hoarding dollars to buy real estate at the bottom of the DEFLATIONARY crash.

Tue, 11/09/2010 - 11:16 | 711681 lolmao500
lolmao500's picture

Hmm no he's not.

 

Obviously you don't read him. He's saying hyperinflation is coming and probably already here.

Tue, 11/09/2010 - 11:21 | 711696 LoneStarHog
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I read him every day and was banned from his little Market Ticker THREE times for saying just what is NOW happening.  I have not seem him publish an apology to all of his Kool-Aid drinkers for leading them over the proverbial cliff.

Tue, 11/09/2010 - 11:28 | 711725 Hansel
Hansel's picture

Are you a 'gold member' at his forum?  He is talking hyperinflation but hates gold so I'm curious what he is invested in.  Up until about 2 months ago he was still talking deflation and hoarding dollars.

Also, CNY isn't the new reserve currency.  GOLD IS.

Tue, 11/09/2010 - 11:12 | 711668 No One
No One's picture

OT - It appears that the guys at money.cnn.com aren't following orders.

Headlines include -

Can the Fed keep stock bubble afloat?

Bernanke's road to hell

Oil near $90. Thanks a lot, Fed

Global leader calls Fed move 'clueless'

Tue, 11/09/2010 - 11:12 | 711673 His Dudeness
His Dudeness's picture

The more important question:

Is China's Yao Ming The New Reserve Rocket, Currently?

Tue, 11/09/2010 - 11:13 | 711675 TradingJoe
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"Me now learning Mandarin"=WNY COM COllege! Class=Oversubscribed!

Tue, 11/09/2010 - 11:14 | 711676 SheepDog-One
SheepDog-One's picture

I hope Bernanke and TIMmah are bathed in cold sweat constantly now!

Tue, 11/09/2010 - 11:19 | 711689 DaveyJones
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dogs pant

Tue, 11/09/2010 - 11:14 | 711678 Whizbang
Whizbang's picture

No, tyler. The RENMINBI is not the new reserve currency, just to answer your question.

Tue, 11/09/2010 - 11:21 | 711698 RSDallas
RSDallas's picture

No other countries currency will replace the USD as a reserve currency. PERIOD.  There will; however, be a "New World Currency". The "New World Currency" will be backed by gold and silver (proportionate to their respective GDP's) from the USA, Germany (maybe called EU), and China and administered by a merger between the World Bank and the IMF. 

This is the only way that the Worlds developed countries can legitimize defaulting on the unpayable level of debt incurred by them.  Maybe everyone involved gets say a 40% haircut.  Ouch!

Tue, 11/09/2010 - 11:31 | 711730 Whizbang
Whizbang's picture

There already is a new world currency, all countries currently pegging thier currency to the dollar are all technically using the same currency. When you have two or more currencies that move the same amount and direction that is in effect a single currency.

Tue, 11/09/2010 - 11:25 | 711712 MountainMan
MountainMan's picture

The Rise Of Silver.

Tue, 11/09/2010 - 11:28 | 711720 Hansel
Hansel's picture

wrong spot

Tue, 11/09/2010 - 11:56 | 711837 web bot
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To suggest that the Renimbi become the reserve currency is a joke. They may think that it can be... but they have a ways to go.

 

Gold and Silver will be the fiat currencies once the slide happens.

Tue, 11/09/2010 - 12:17 | 711917 goldsaver
goldsaver's picture

Gold and Silver will be the fiat currencies once the slide happens.

Gold and silver can not be the new fiat currency.

They are not fiat. They just are.

They are not currency. They are money.

Tue, 11/09/2010 - 16:41 | 713251 web bot
web bot's picture

If on day x, silver is $250 USD / troy oz and contracts are denominatd in silver... then silver is the currency.

Tue, 11/09/2010 - 12:15 | 711910 bankonzhongguo
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Despite China's ancient culture, the wealth and influence of Western institutions will not be relativized.  The emerging basket of "local" currencies like the USD, EUR with gold, oil and wheat will be the "stabilizing" force a la the IMF and the BIS that serves to "save" our fate.  By 2012, every government and industry will be looking to the beneficent power of an alien financial power, but never uncontrollable China.

Tue, 11/09/2010 - 12:43 | 712016 Boop
Boop's picture

International trade transactions settled in yuan more than doubled to a record in the third quarter as companies including Nokia Oyj and Metro AG turned to a currency that rose 24 percent against the dollar in six years.

The value of settlements jumped 160 percent from the prior three months to 126.5 billion yuan ($19 billion), the People’s Bank of China reported late yesterday. The amount exceeded all but one of seven forecasts in a Bloomberg survey of analysts. Metro, Germany’s biggest retailer, says paying Chinese suppliers in yuan benefits both parties.

Tue, 11/09/2010 - 14:11 | 712390 FreedomGuy
FreedomGuy's picture

Frankly, this is punishment for China's fixed exchange rate. It seems to me that the other countries can make the yuan or euro and defacto reserve by simply listing their prices in those currencies. They can be converted to dollars but the conversion rates will change to properly value the dollar.

In the end, no fiat currency has ever survived its own manipulation. The world may be about to learn that lesson...again and painfully.

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