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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 | Link to Comment lolmao500
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Doom! Yay!

Tue, 11/09/2010 - 11:01 | Link to Comment doomandbloom
doomandbloom's picture

yes..did you call me?

Tue, 11/09/2010 - 11:05 | Link to Comment SWRichmond
SWRichmond's picture

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

Tue, 11/09/2010 - 11:07 | Link to Comment unum mountaineer
unum mountaineer's picture

green = go

Tue, 11/09/2010 - 11:16 | Link to Comment SheepDog-One
SheepDog-One's picture

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

Tue, 11/09/2010 - 11:24 | Link to Comment 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 | Link to Comment SWRichmond
SWRichmond's picture

primers are back on the shelves, even match primers.

Tue, 11/09/2010 - 11:00 | Link to Comment 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 | Link to Comment 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 | Link to Comment Fish Gone Bad
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The king is dead.   Long live the king.

Tue, 11/09/2010 - 11:00 | Link to Comment IrishSamurai
IrishSamurai's picture

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

Tue, 11/09/2010 - 11:03 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment Turd Ferguson
Turd Ferguson's picture

Big G20 hoedown this weekend, too.

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

Tue, 11/09/2010 - 11:03 | Link to Comment 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 | Link to Comment 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 | Link to Comment 37FullHedge
37FullHedge's picture

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 | Link to Comment 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 | Link to Comment juangrande
juangrande's picture

4 to 1 consolidation

Tue, 11/09/2010 - 11:12 | Link to Comment buchesky
buchesky's picture

Bizarre.  My trading account shows the higher price, but same number of shares as does Google Finance.

Tue, 11/09/2010 - 11:22 | Link to Comment hettygreen
hettygreen's picture

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 | Link to Comment Boston
Boston's picture

one for four reverse split

Tue, 11/09/2010 - 12:42 | Link to Comment 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 | Link to Comment LoneStarHog
LoneStarHog's picture

But...but...Douchenger is hoarding dollars to buy real estate at the bottom of the DEFLATIONARY crash.

Tue, 11/09/2010 - 11:16 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment TradingJoe
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"Me now learning Mandarin"=WNY COM COllege! Class=Oversubscribed!

Tue, 11/09/2010 - 11:14 | Link to Comment SheepDog-One
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I hope Bernanke and TIMmah are bathed in cold sweat constantly now!

Tue, 11/09/2010 - 11:19 | Link to Comment DaveyJones
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dogs pant

Tue, 11/09/2010 - 11:14 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment MountainMan
MountainMan's picture

The Rise Of Silver.

Tue, 11/09/2010 - 11:28 | Link to Comment Hansel
Hansel's picture

wrong spot

Tue, 11/09/2010 - 11:56 | Link to Comment web bot
web bot's picture

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 | Link to Comment 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 | Link to Comment 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 | Link to Comment bankonzhongguo
bankonzhongguo's picture

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 | Link to Comment 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 | Link to Comment 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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