US Dollar vs Renminbi

Finanza Operativa di Finanza Operativa 6 Febbraio 2017 | 13:00

A cura di Walter Snyder, Swiss Financial Consulting

This Newsletter has often mentioned the rise of the renminbi as an international currency and its potential to challenge the US dollar as the most important means of exchange globally. It seems that most analysts take notice of this but do not see a major shift coming any time soon. The Chinese long-term plan may come to fruition sooner than later.

The US dollar may appreciate further and become even more overvalued before the turning point is reached. The Trump effect may last a bit longer, but by Q4 2017 and no later than the end of H1 2018 the tide will begin to turn against the greenback. The reason why a shift is imminent is that the PBoC has been carrying out a massive programme of extending credit to SOEs and generally putting lots of liquidity into the system. In order for a currency to become international, there has to be enough of it in circulation to meet the demand. The US has sent trillions of dollars overseas thanks to trade deficits besides having the Fed inject trillions into the economy via QE.   The implementation of QE was not only an attempt to stimulate the economy and boost asset prices but also to ensure that there was a sufficient amount of dollars available for international exchange.

The PBoC is going about this in its own way. The restrictions recently put on sending yuan outside the country are really an attempt to mask the actions of the PBoC in its plan to expatriate renminbi in large quantities so that international commerce will have a sufficient amount of yuan to complete transactions. Promoting the use of IMF SDRs is also a part of the plan for competing with the US dollar.

The ECB`s desperate effort to save the euro by employing QE to stimulate the economy of the EU  has resulted in the euro being close to par with the US dollar. The renminbi is also trading lower, but that is fine for China since it means that its export industries will continue to be competitive. China also wants to divest itself of its dollar reserves gradually and to shore up the renminbi at the same time as it makes more of its own currency available globally. China fears a crash of the US dollar since that would cause a loss in the value of the dollars already held. A gradual shift instead will preserve the value of the dollar so that China could avoid losses. As soon as dollar holdings have been adequately reduced, the PBoC will pressure oil suppliers to give up insisting on dollars in payment for black gold.  At that point the inevitable decline of the US dollar will begin and subsequently accelerate. It could lose up to 30% to 40% of its present value. The smart boys will have long since gone short.

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