"Sic Transit Gloria Pecuni" - LME Considering Ending Sterling, Allowing Renminbi Settlement

Tyler Durden's picture




 

On a long enough timeline, all things come to an end. Even for such venerable venues as the London Metals Exchange, with its 130 year history, and its annual turnover of over $11 trillion in metal contracts, which also makes it the largest market for non-ferrous metals. As the English FT reminisces, "When the LME was established in 1877, Britain was one of the world’s most important manufacturing powerhouses, and the LME’s benchmark contracts for delivery in three months were designed to mirror the length of time needed to reach British ports for shipments of copper from Chile and tin from Malaysia." Furthermore, in the beginning, and all the way through 1993, the flagship copper contract was denominated in sterling, at which point it was switched to the USD following the "Black Wednesday" ERM sterling crisis, courtesy of George Soros who made about $1 billion by shorting the GBP, and formally ended the sterling's role as even an informal backup reserve currency. As of today, insult follows inury, as the LME has formally asked the members of the exchange to drop the sterling contract denomination (in addition to USD, EUR, and JPY contracts) and replace it with the Chinese renminbi. Why this sudden and dramatic, if gradual and tacit, admission that the CNY is the ascendent reserve currency? Because, as the FT reminds us, China has become the market for non-ferrous metals: it is "the dominant force in the market, accounting for more than 40 per cent of global demand for most metals and a rapidly increasing share of trading in LME futures." Add that to yesterday's news of a widening in the CNY band (which incidentally is much ado about nothing, at least for now: at best it will allow China to devalue its currency when and if it so desires much faster than before, much to Geithner's final humiliation), and to the previously reported extensive network of bilateral CNY-based trade agreements already cris-crossing Asia, and one can see why if America is not worried about the reserve status of the dollar, it damn well should be.

From the FT:

The LME is asking its members as part of a survey to help the exchange design its planned new clearing house whether they would like the renminbi to be added to the roster of currencies on offer for settling and clearing, and sterling dropped. The LME plans to maintain its benchmark denominated in US dollars. “We are always looking at new ways to help the market,” the exchange said.

 

The move would be a final blow to sterling’s role in metals trading. The LME’s flagship copper contract was denominated in sterling until 1993, when it switched to dollars in the wake of the Black Wednesday sterling crisis.

 

The use of the UK currency to settle and clear LME contracts has dwindled to negligible levels in recent years, brokers say. “I haven’t traded a contract in sterling for five years,” said the head of one large LME brokerage.

Why China? Because, for better or worse, it has become the marginal buyer.

The use of the renminbi in commodities markets is, on the other hand, slowly increasing as China moves to internationalise its currency. Hong Kong Exchanges & Clearing (HKEx) has announced plans for a range of renminbi-denominated commodity futures, while the Hong Kong Mercantile Exchange (HKMEx) is planning to launch renminbi gold and copper contracts.

 

The Chinese currency would need to become more freely tradable before it could be used for LME trading and settlement. Over the weekend Beijing announced the latest step in the internationalisation of the renminbi, widening its daily trading band.

 

The discussion at the LME reflects the growing involvement of Chinese companies on the exchange. The LME announced this month that Bank of China had applied to become its first Chinese member. It opened an office in Asia in 2010 and members of staff now have business cards printed in both English and Mandarin.

The implications, at least optically, need no further explanation. We would like to conclude with our favorite chart from JPMorgan, which we have dubbed sic transit gloria pecuni.

At this point we are fairly confident which currency is coming next in the new top right space (whether backed by hard assets, and in joint execution  with Russia and/or Germany, or not).

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Mon, 04/16/2012 - 20:52 | 2350204 sampo
sampo's picture

There goes the dollar..

Mon, 04/16/2012 - 20:53 | 2350209 spiral_eyes
spiral_eyes's picture

These barbarous metalheads and their barbarous metals.

People need to listen to Paul Krugman. The only way to save the dollar is to print trillions and trillions more, and hand them out to all households to end income inequality and raise aggregate demand.

Sorry guys. I'm in a sarcastic mood.

Mon, 04/16/2012 - 21:08 | 2350231 Pladizow
Pladizow's picture

Is this a reward for P.A.G.E being disolved?

Mon, 04/16/2012 - 21:32 | 2350274 AldousHuxley
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FDIC was sued by Judicial Watch twice seeking information regarding the FDIC decision jointly with the Federal Reserve and Treasury Department to “bailout” Citi.

Bair remarked, "We were told by the New York Fed that problems would occur in the global markets if Citi were to fail. We didn't have our own information to verify this statement, so I didn't want to dispute that with them."

 

she played along to get along but no fan of the central bank.

 

Tue, 04/17/2012 - 07:54 | 2350868 GetZeeGold
GetZeeGold's picture

 

 

When you become irrelevant......that's when you know it's time to bow out gracefully.

 

Happy trails amigos.

 

Mon, 04/16/2012 - 21:09 | 2350233 AldousHuxley
AldousHuxley's picture

Chinese RMB's advantage is that they don't have to convince the world to use their currency because China alone is such a large chunk of the world in terms of population.

 

The question is whether dollar, euro, GBP, will merge into  SDR against RMB or not.

 

value of 1 SDR:

1980:     USD 42%, DEM 19%, FRF 13%, JPY 13%, GBP 13%

2010:     USD 42%, EURO 37%, JPY 9%, GBP 11%

 

You can see Germany and France have stronger currency under Euro than separately before.

 

also note that 2001-2010, USD had share of 44%

Mon, 04/16/2012 - 22:00 | 2350317 LongBalls
LongBalls's picture

I have been saying for months to my friends and family that the U.S. will merge with Europe and trade as one currency to fight off the East. The weakest EU nations are going to be asked to leave.

Mon, 04/16/2012 - 22:04 | 2350332 Caviar Emptor
Caviar Emptor's picture

SDR for the ages: USD: 33% CNY: 33% ICBM: 33%.

There. Fixed it. 

Tue, 04/17/2012 - 06:50 | 2350823 PMakoi
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http://developer.mintchipchallenge.com/

Today's digital economy is changing faster than ever, and currency has to change too. It is, introducing MintChip, from the Royal Canadian Mint - the evolution of currency.

Mon, 04/16/2012 - 21:17 | 2350246 Dermasolarapate...
Dermasolarapaterraphatrima's picture

I'm waiting for Ben to resurrect the $1000 and $500 bills....what will they look like?

Mon, 04/16/2012 - 21:27 | 2350263 AldousHuxley
AldousHuxley's picture

they will be in a coin form.

Mon, 04/16/2012 - 22:30 | 2350376 BooMushroom
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Aren't coins more expensive to produce than paper bills?

Mon, 04/16/2012 - 23:19 | 2350452 lemonobrien
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sen yen.

Tue, 04/17/2012 - 08:40 | 2350969 tradewithdave
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Not if you are allowed to confiscate the seignoirage.

http://tradewithdave.com/?p=9935

 

 

Mon, 04/16/2012 - 22:54 | 2350414 i_fly_me
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By the time they admit they are needed they will need bigger bills than that, a lot bigger.

Tue, 04/17/2012 - 01:33 | 2350628 RafterManFMJ
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Aight. We know our 'leaders' be they Reptilian Planet X RedShield THEY LIVE aliens or not, really don't want to go wax cars for a living, nor see their kids hunted for sport. So, can they pull this out? Honestly? Issue the New Dollar (IMPROVED, WITH 1/3 THE VALUE!), Issue the Amero, peg the new currency to gold while 'temporarily' devouring all gold held in 'trust' HEEHEE sorry Germany!, and nationalizing all US Gold/Silver mines?

 

Common sense says it's good to be king, and you don't give this up unless you are facing the gallows...so, do you ZH'ers think they can pull this out? And if so, by what mechanism? 

Mon, 04/16/2012 - 20:56 | 2350215 fonzannoon
fonzannoon's picture

Shiela Bair just said the same thing except she was not being sarcastic

 

Mon, 04/16/2012 - 21:05 | 2350227 Tyler Durden
Mon, 04/16/2012 - 21:08 | 2350232 ekm
ekm's picture

I fell for that. When I read it for a 2nd time, I said: Stupid, stupid, stupid, stupid.

Mon, 04/16/2012 - 21:09 | 2350236 fonzannoon
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She may have been being sarcastic, but....okay fine she was being sarcastic. What is the term for someone who is being sarcastic, yet at the same time is actually predicting a correct outcome?

Mon, 04/16/2012 - 21:16 | 2350242 LetThemEatRand
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It is ironic that she would sarcastically advocate a ridiculous idea that is actually being implemented by the Bernanke.

Mon, 04/16/2012 - 21:15 | 2350244 fonzannoon
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Irony...thank you. Thats what I was looking for. 4 beers.....

Tue, 04/17/2012 - 07:54 | 2350871 Mr. Lucky
Mr. Lucky's picture

I thought sardonic.

Mon, 04/16/2012 - 21:27 | 2350265 Koffieshop
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Ironical sincerity?
And people should do it more often. Taking the "I'm joking but I'm not" attitude can get opinions on grave matters across to people not looking for a serious discussion.

Mon, 04/16/2012 - 21:44 | 2350295 palmereldritch
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 sarcaustic

Mon, 04/16/2012 - 21:59 | 2350324 akak
akak's picture

Sucktastic

Tue, 04/17/2012 - 00:16 | 2350530 swmnguy
swmnguy's picture

An old expression for that is, "Kidding on the square."

Tue, 04/17/2012 - 04:12 | 2350742 StychoKiller
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Gads, I must be getting old!  I actually recognized that phrase.

Tue, 04/17/2012 - 01:37 | 2350635 RafterManFMJ
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What is the term for someone who is being sarcastic, yet at the same time is actually predicting a correct outcome?

 

The White Man call that 'Demonic.'  And after you hear what she has to say, you normally have to run from an ill-lit collapsing ruin while being pursued by rabid monkeys/flying snakes/angry natives/equity bagholders.  Bonus points if your escape helicopter carries you and your metal away, while dropping 100 dollar bills on your pursuers. 

Tue, 04/17/2012 - 06:25 | 2350802 francis_sawyer
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Hope & (then) Change

Tue, 04/17/2012 - 07:15 | 2350838 _underscore
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She wasn't being sarcastic - sarcastic is overt & relies on a knowing or willing audience; this was more nuanced, subtle. The correct term to use is sarcastic's gentler cousin - disingenuous(ness). That is, one who feigns not to know they are talking as the naif would in that circumstance/context/subject matter area.

Tue, 04/17/2012 - 07:05 | 2350835 disabledvet
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disabledvet

Mon, 04/16/2012 - 21:18 | 2350252 nmewn
nmewn's picture

"Actually, she was being sarcastic."

Yes she was...and I prefer it without the sarc tag...just like flushing quail ;-)

Tue, 04/17/2012 - 01:03 | 2350606 jonjon831983
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For ppl not understanding that post.  The term "Modest Proposal" = Extreme suggestion that is meant as a joke.    Look up some centuries old Jon Swift's A Modest Proposal... Basically to solve poverty issues for the poor, he presented a modest proposal to sell their children as food.

 

Doom on you if you took it for realz and sold.

Mon, 04/16/2012 - 21:00 | 2350222 Mr Lennon Hendrix
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Whatever.  All fiat is worthless.

Mon, 04/16/2012 - 21:20 | 2350254 ekm
ekm's picture

Very good point. US$ "reserve status" is only backed by US Military, particularly US Navy securing world trade routes. Somebody has to pay for it so the West exchanges real goods and services for electronic dollars (except for in Nov 2011 when Bermanke accepted the Euro-Dollars Swaps). All other world currencies were backed by something real.

I think Tyler is exaggerating the "RMB new world reserve thing", on purpose, for a more colorful writing. Internationalizaton would mean that the world or part of the world exchanges real goods and services for electronic RMB, which I don't see any chance of happening anytime in the next 500 years.

What is really striking to me, is the Barter System the world is evolving into, due to the excessively excessive amount of US$ in the system, that are ending up ...not being exchanged with goods and services, hence parked back to Fed or ECB as "reserves" (that's the key word).

I think the word "reserve" is the most manipulated word in finance. Crude oil is a reserve, gold and silver are reserves, a good crop is a reserve, copper is a reserve, but.....electrons???

Regardless of how much US is need to secure some kind of "world peace" as far as trading is concerned (thx to US Navy), I don't see many resource producers accept excessive electrons in exchange for mostly finite real stuff. That's why the Bilateral Swap Agreements, it's just barter system between China and the other countries.

Mon, 04/16/2012 - 21:29 | 2350267 LetThemEatRand
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"US$ "reserve status" is only backed by US Military"

Hmmm.   I wonder what gigantically overwhelming military forces do when their masters are facing the loss of their ability to conjure money out of thin air to support their mega-yacht-jet-to-Paris-for-lunch lifestyles....?

Mon, 04/16/2012 - 21:42 | 2350285 ekm
ekm's picture

Good point.

Payment of the overwhelming military has been one of the main reasons for the fall of empires, Rome and Ottoman Empires come to mind.

In Rome actually it came a time when it was the praetorian guard or strong portions of the army that would choose an emperor based on solely on how much the emperor would promise to pay. Constantin the Great was chosen Emperor when he was in England by his own army.

If it ever happens that the US has difficulties paying the military personnel, it's game over.

Mon, 04/16/2012 - 21:46 | 2350301 Mr Lennon Hendrix
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And I wonder what happens when the US ilitary have trouble conjuring up cheap oil, coniering that oil and the dollar trade inversely.

Mon, 04/16/2012 - 21:54 | 2350315 ekm
ekm's picture

If by "having trouble" means lose a major war over commodities?  One never knows, but so far it seems not realistic. US Military is too strong and each time somebody (like Iraq) wanted to trade not in dollars and controlled a huge part of oil production, we all know what happened.

All wars are done for natural resources, no exception to this rule.

Mon, 04/16/2012 - 22:07 | 2350345 Mr Lennon Hendrix
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If you have the machines, but can no longer fund to fuel them, your army runs into problems.  Hitler didn't have any oil so he had to liquify coal to run his tanks, and look where that got him.

Mon, 04/16/2012 - 22:15 | 2350360 ekm
ekm's picture

IMO there is always a probability of anything, but not real possibility of that happening anytime soon. You never know, though, I'm just being realistic.

Mon, 04/16/2012 - 22:44 | 2350397 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

If the dollar loses significant value, and/or the US MIC can not capture the necessary resources to run its war machines, then the US will be incapacitated.

If the US MIC is incapacitated, then the regime falls.

Mon, 04/16/2012 - 22:50 | 2350400 ekm
ekm's picture

Nothing to disagree with.

That's why I think interest rates are going up. The more they stay zero the more the world will reject dealing with dollars, hence US may end up lacking not just crude oil, but grains, plastic imports anything US does't make but americans are used to having without worry.

Higher interest rates will make big money investors earn some interest while the money is parked in the US. But higher interest rates would mean less dollars in circulation, not more.

Mon, 04/16/2012 - 22:59 | 2350420 Bastiat
Bastiat's picture

Higher interest rates will mean a accelaration to the federal deficit spiral.

Mon, 04/16/2012 - 23:15 | 2350444 ekm
ekm's picture

God, you challenged me. I wanted to go to sleep.

Correct, unless...a diflation shock happens, which I think it is, by design.

Look, Bear Stearns and Lehman destroyed something between 50-100 trillion dollars in derivatives which created a deflation shock, quite low commodity prices hence Fed could do Cocainated Easing.

However, If let's say BAC, C, ML, Jefferies go for elephant shit, about $300 trillion (arbitrary number) in derivatives could just vanish. Commodities' prices would collapse.

Hence, the Treasury could issue bonds and Fed would buy them at Congress' orders (deficit spending) at higher interest but at lower interest payments due to less money around.

Who takes the loss? Thousands of wall street guys unemployed, thousands of hedge funds being long on commodities and China as well as people who invested with those hedge funds all over the world. That's my view. It's just a view, but my money is on it, literally.

Tue, 04/17/2012 - 00:22 | 2350549 Bolweevil
Bolweevil's picture

ZIRP4EVA
there, fixed it. Not a fan of the ... fixed it thing, but you walked right into that one.

Mon, 04/16/2012 - 22:51 | 2350409 Prometheus418
Prometheus418's picture

You're assuming that the US will continue to prevent domestic drilling in that case- bad assumption.  Those resevoirs aren't earmarked for you and I to get to work- but if the military needs them, expect to see a whole different tune.

Tue, 04/17/2012 - 06:36 | 2350814 francis_sawyer
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Yeah ~ everything gets 'nationalized' & you're told it's your patriotic duty to buy war bonds (which become worthless when the war is over)...

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