About Usd/Cny

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di Finanza Operativa 3 Aprile 2018 | 13:00

A cura di Walter Snyder, Swiss Financial Consulting

The opening of the Shanghai oil futures Exchange on 26th March 2018 has been commented on by various market observers. Some think that US dollar dominance in global finance will continue for a long time while others hail the beginning of the end of the petrodollar. It is clear that the US dollar is not going to be replaced immediately by the renminbi as the principal currency of global exchange, but it is worthwhile looking at a blip on the radar screen to appreciate the significance of the event.

One can easily see that something happened on 26th March by looking at a chart recording the exchange rate between the US dollar and the Chinese renminbi. The dollar opened at 6.3115 and a low of 6.2685 was reached that day while Tuesday recorded a low of 6.2446. The greenback then promptly bounced back up and finished the week at 6.2728.

It is not hard to believe that the PBoC was watching very closely what would happen on the Forex market that Monday morning and subsequently. The Chinese government believes very strongly in stability, and one aspect of policy will be to maintain stability while the renminbi makes progress towards becoming one of the most important currencies if not the principal one in global finance.

There are, of course, many other considerations that can influence exchange rates. The Fed interest rate hike in March and two more planned for later in the year will certainly influence investors thinking about giving more weight to fixed income instruments in their portfolios. The possible trade war between the US and China may have a significant effect on the volume of trade and inflation in the US. The likelihood of an end to the equity bull market that has been plowing ahead since 2008 may result in a recession, which many commentators expect for 2019.

The PBoC will not want the renminbi to become much stronger since that would have a negative effect on Chinese export industries. There are also the large sums that China holds that are tied up in US government bonds. A weaker dollar means that China`s dollar holdings would lose in value. The long-term solution is to divest slowly but surely and maintain a stable exchange rate as the renminbi works its way into the reserve holdings of major central banks.

Forex traders can reckon on a weaker US dollar as time goes on. The problem is that China does not want an extremely strong renminbi, and the Chinese plan decades ahead, not in quarters like American executives. Time will tell.

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