Diversifying Away From the Dollar

The yuan fix for the day is 6.9508.
The yuan is trading in lockstep with the euro since August of last year.

In 2012 I wrote:
One of my main reasons for predicting a depreciating Chinese yuan (and I've been wrong for about 2 years thus far) is that I expect a U.S. dollar bull market against foreign currencies, and the PBOC's switch to a currency basket means it will break with the U.S. dollar. Previously, China was adding euros during the first and second round of the Greek crisis, which structurally weakened the yuan (based on my expectation of euro depreciation). The above article shows that the PBOC hadn't followed its rhetoric and is only now relying on the currency basket, which could go a long way to explain the depreciation in May. The wildcard in the basket is the yen.
If the dollar closes in on its old high versus the euro and hits 85 cents, it isn't the end of the world...but if the yuan follows it in lockstep, USDCNY will fall below 8.28......

ZH: China Dumps Treasuries: Foreign Central Banks Liquidate A Record $403 Billion In US Paper
Fast forward to today when in the latest monthly update for the month of October, we find that what until a month ago was "merely" a record $375 billion in offshore central bank sales in the LTM period ending September 30 has, one month later, risen to a new all time high $403 billion in Treasuries sold in the past 12 months.

...In some cases, like China, this is to offset devaluation pressure; in others such as Saudi Arabia and other petroleum exporting nations, it is to provide the funds needed to offset the drop in the petrodollar, and to backstop the country's soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.
De-dollarization happens via deflation, not inflation. During deflationary periods, countries rely on domestic credit growth which at the time exacerbates local currency depreciation versus the U.S. dollar. The greenback's coup de grace will be inflation, but the structural seeds of de-dollarization are sown during deflation.

No comments:

Post a Comment