The past year was full of events that inevitably split the global geopolitical space into two camps: those who still support using US currency as a universal financial tool, and those who are turning their back on the greenback.
Global tensions caused by economic sanctions and trade conflicts triggered by Washington have forced targeted countries to take a fresh look at alternative payment systems currently dominated by the US dollar. Continue reading
A Country Matures, An Exchange Rate Declines
After two weeks on the road visiting clients your analyst returns with a better view of the consensus outlook. There is, though, much in the consensus to disagree with. In particular it seems peculiar that the consensus believes the democratically elected government of Italy, with policies entirely contrary to EU membership, will be put through the bureaucratic meat grinder in Rome and Brussels and turned into EU sausage, in a similar process that minced the political representatives of Greece.
While this might well be the case, it is hard to understand that the grinding destruction of this democracy, even if it is only moderate compared to the Greek experience, can be anything but bad for growth and asset prices in the EU. Disciplining these politicians to abandon their manifesto promises and follow the ways of the EU is highly unlikely to be a painless experience, either for Italy or the rest of the EU. Nonetheless, investors are content to believe that a painless disciplining of Italy’s elected representatives is all but inevitable. We shall see.
Perhaps the most prevailing consensus view is that the recent weakness of the RMB represents a Chinese counter-punch in the trade war with the US. Coming when it does, it is easy to see the accelerated decline of the RMB as a tactical and not a strategic move. Comments by the PBOC on July 3rd have probably reassured many investors that the managed exchange rate regime is not at risk and that the RMB will continue to be managed against a basket of currencies. Your analyst does not agree. Continue reading
Nothing happens by accident in China and this massive drop in the value of the Yuan mirrors the violent devaluation, snap in 2015…
Trump and Xi have spent much of the last few weeks tossing tariff grenades across the Pacific Ocean as retaliatory retaliations grow ever stronger in rhetoric and potential escalations.
Then this week, Trump seemed to back away from his most serious threats (direct Chinese investment restrictions).
We wonder if this is why… Continue reading
Note: Please see the source for currency swap agreements chart.
image/youtube screen grab
For the past year and half a major topic throughout the alternative press has been the new Chinese oil futures contract settled/priced in yuan. The fact that China is directly challenging the Federal Reserve Note, U.S. dollar, is quiet a significant change. For those that have been paying attention this new futures oil contract is nothing more than the next step in China moving completely away from the Federal Reserve Note, and the “world reserve currency” system and towards a multi-polar world with several currencies being used for international trade. Continue reading
Beijing sent the first messaging salvo ahead of the Steven Mnuchin-led delegation to China (which will engage in trade talks over May 3-4) overnight when the PBOC fixed the yuan sharply lower than many expected. The signal was clear: push us hard enough, and we may just launch another devaluation. Or worse.
A little while later, Beijing did its best attempt at managing expectations, when it said that it’s “unrealistic” to expect to solve all issues between the U.S. and China at a single meeting, given the economic sizes of the two countries and their complex economic and trade relationship, foreign ministry spokeswoman Hua Chunying says at daily briefing.
While Hua tried his best to pay the diplomatic “good cop”, saying it was in the mutual interest of both countries to solve trade issues through consultation, just a few hours later, China’s foreign minister Wang Yi was the bad cop, who warned that whereas China would welcome a successful outcome from upcoming trade talks with the United States, it is “fully prepared for all outcomes and will not negotiate on core interests.”
(Shutterstock)
A popular thesis since the 1930s is that a natural progression exists from currency wars to trade wars to shooting wars. Both history and analysis support this thesis.
Currency wars do not exist all the time; they arise under certain conditions and persist until there is either systemic reform or systemic collapse. The conditions that give rise to currency wars are too much debt and too little growth.
In those circumstances, countries try to steal growth from trading partners by cheapening their currencies to promote exports and create export-related jobs. Continue reading
We reported back in November 2016 – Cashless World: 1 out of 3 People Never Use Cash – fewer and fewer people understand the importance of using cash to protect themselves from an overarching government warlord. At the time, China’s use of digitized currency was growing at about 40% per annum. This means millions of people each year freely hand over their cash and opt to use their cell phone, online currency transfers or a plastic debit/credit card to make 100% of their purchases. We see this as nothing short of happily going into the gulag of digital enslavement. Continue reading
While this sounds like a step that needed to be taken, and it is, it’s too little too late. China (and Russia) have created an alternative to SWIFT. Thus, cutting China off only means it will switch to its own and abandon the U.S. Dollar system — with Russia likely to join. In effect, it will end up hurting the United States more than the intended target(s).
Over the last decade China and Russia have feverishly worked around America’s global influence. Russia and China no longer need GPS, as they have their own indigenous satellite navigation systems — Europe, too. You’ll only do their militaries a favor if you cut that off. Control over the internet has been ceded by America, so there’s also no method or means of punishment there. The IMF has been undermined by the AIIB, so it’s also hard to do anything there as well.
America’s choices are limited and not as effective as they used to be. The joke may be on the U.S. should push come to shove. The alternatives set up only mean America will likely isolate itself should it choose punitive measures.
In an unexpectedly strong diplomatic escalation, one day after China agreed to vote alongside the US (and Russia) during Monday’s United National Security Council vote in passing the watered down North Korea sanctions, the US warned that if China were to violate or fail to comply with the newly imposed sanctions against Kim’s regime, it could cut off Beijing’s access to both the US financial system as well as the “international dollar system.”
Speaking at CNBC’s Delivering Alpha conference on Tuesday, Steven Mnuchin said that China had agreed to “historic” North Korean sanctions during Monday’s United Nations vote. “We worked very closely with the U.N. I’m very pleased with the resolution that was just passed. This is some of the strongest items. We now have more tools in our toolbox, and we will continue to use them and put additional sanctions on North Korea until they stop this behavior.”
One of the more troubling stories to hit the tape last week was that despite, or rather due to, roughly $100 billion in losses in the past 5 quarters, Japan’s gargantuan $1.4 trillion state pension fund, the GPIF, which has desperately been selling Japan’s best performing asset – Japanese Government Bonds – in order to buy local stocks and the Nikkei at its decade highs only to see its equity investment plunge, is now forced to buy even more stocks, i.e. double down, as part of a ridiculous rebalancing which will lead to even more losses.
Japan is not alone.
After China did everything to prop up its own stock market, including arresting hedge funders, sellers, “rumormongers”, halting short selling, eliminating futures trading, and ultimately culminating with the “Buttonwood SPV” in which the PBOC finally threw in the towel and admitted it was directly buying stocks, we now learn that Chinese pensioners are about to become unwitting stock funds. Continue reading
For the past year, Chinese selling of Treasuries has vexed investors and served as a gauge of the health of the world’s second-largest economy.
The People’s Bank of China, owner of the world’s biggest foreign-exchange reserves, burnt through 20 percent of its war chest since 2014, dumping about $250 billion of U.S. government debt and using the funds to support the yuan and stem capital outflows.
While China’s sales of Treasuries have slowed, its holdings of U.S. equities are now showing steep declines. Continue reading
After a brief hiatus from the ongoing currency wars, China fired another salvo at The Fed tonight by devaluing the Yuan fix to 6.5693 – its weakest against the USD since March 2011. After eight days higher in a row for The USD Index, it seems PBOC has turned its currency liberalization plan off, stabilizing the broad Renminbi basket (which has been steadily devalued) and turning its attention to devaluing against the USD. Having unleashed turmoil in August (pre-Sept FOMC) and January (post Dec rate-hike), it appears the rising rate-hike probabilities jawboned by The Fed are decidedly disagreeable to “authoritative persons” in China. Continue reading
Note for our readers : Following our monetary research work under the form of a surveillance of several months, our team is worried again about the US dollar. After a calming two year time, the dollar is heckled again within today’s new multi monetary world. Surprised by the conclusions of its own analyses, presented here below exclusively to you, our team of experts wishes to warn you, the GEAB readers, about the possible danger threatening the dollar. 2016 could very well be the year when the dollar wall will fall…
To explain the current financial turmoil, all official accusing fingers are pointing to a single guilty party: China, the ideal guilty player, the same way Greece and the euro currency were at their time. It is true that evidence seems to be on the side of those accusing fingers, due to the recently unstable Shanghai stock market and its low values. Continue reading
When China reported its economic data dump last night which was modestly better than expected (one has to marvel at China’s phenomenal ability to calculate its GDP just two weeks after the quarter ended – not even the Bureau of Economic Analysis is that fast), the investing community could finally exhale: after all, the biggest source of “global” instability for the Fed appears to have been neutralized. Continue reading
The US Dollar has traded within a relatively “stable” band against the offshore Yuan for much of the last six weeks…
But when compared to the collapse of the Yuan “basket” – as PBOC devalued against the rest of the major trading partners – the ‘stealth’ devaluation is obvious… Continue reading
WASHINGTON – Confronted with a plunge in its stock markets last year, China’s central bank swiftly reached out to the U.S. Federal Reserve, asking it to share its playbook for dealing with Wall Street’s “Black Monday” crash of 1987.
The request came in a July 27 email from a People’s Bank of China official with a subject line: “Your urgent assistance is greatly appreciated!” Continue reading
Global Geopolitics 