Tin Foil Hats, Economic Reality and the Total Perspective Vortex

[pmbug]

The contemplation by Asian finance leaders to add the Chinese and Japanese currencies to a regional foreign reserves buffer fund is the latest sign that the trade war is causing countries to slowly move away from dependence on the US dollar.
...
The 10 members of the Association of Southeast Asian Nations plus China, Japan, and South Korea, together known as “Asean+3”, were reported earlier this month to be considering including the yuan and the yen to their Chiang Mai Initiative Multilateralisation (CMIM) scheme, a framework for multicurrency swap arrangements.

The US$240 billion CMIM scheme was established in response to the 1997 Asian financial crisis to serve as a safety net that provides US dollar support to any one of the countries in the event of a liquidity crisis.
...
The Asean members are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

The review of the CMIM scheme to add additional regional currencies into the fund, amid the escalating US-China trade war, underscores not only growing efforts in Asia to bolster intraregional financial linkages, but also the regional countries’ intent to reduce reliance on the US dollar-based financial system.
...

https://www.scmp.com/economy/china-...-trade-war-starting-erode-us-dollar-dominance

 

[pmbug]

WSJ published an overview of things we've been highlighting in this thread for a while now. Gata posted a non-paywall bit of it here:

Will the U.S. dollar soon lose its status as the world's pre-eminent currency? The consensus is no—it's said that any move away from the dollar would take decades. This view is too complacent.

Developments in foreign-exchange markets during the past 18 months point toward dedollarization. Consider that Chinese "petroyuan" crude-oil futures, launched last year in Shanghai, now sit right behind Brent and West Texas Intermediate in trade volume. The world's central banks bought more gold last year than at any time since President Nixon took the U.S. off the gold standard in 1971. Markets recently learned that China added gold to its reserves for the fifth month in a row. Earlier this year, the U.K., France, and Germany created a new payment-processing system to permit payments to Iran. It will begin quietly with humanitarian aid, then move to other goods and services, potentially competing with the American-influenced Swift system.
...

More: http://gata.org/node/19093

 

[pmbug]

Chinese press still sabre rattling over the sale of US Treasuries:

As American pundits and polls dismiss the idea that China would dump its massive holdings of US Treasury debt as retaliation against US tariffs, a contrarian view is emerging in Beijing that the government may use the securities as a “weapon of last resort."
...
... with Beijing vowing to fight "to the end" and the U.S. preparing to place a 25-percent tariff on a further $300 billion of Chinese imports, China may have "no choice but to sell" its U.S. Treasury holdings, according to some analysts and reports widely distributed on China's social media.

This would devalue U.S. bonds, causing yields to rise, potentially sharply. If China converted the dollar proceeds from its sale back into yuan, it would strengthen the Chinese currency against the U.S. dollar, potentially significantly.

However, one line of thinking is that because the trade war could remove the U.S. as a viable market for Chinese exports, a strengthening yuan against the dollar -- which would make Chinese goods more expensive for American buyers -- may be seen as an acceptable outcome by Chinese policymakers.

"This will happen only when China has no other option. It is a weapon of last resort," said David Chin, the founder of Basis Point Consulting. "If China is not exporting to the U.S. any more, then they do not need to have a weak yuan and strong dollar to encourage Americans to buy." ...

https://www.scmp.com/economy/china-...-its-us-treasuries-fight-trade-war-contrarian

 

[rblong2us]

Trump is not stupid nor are the Chinese
theres a lot of hot air but both sides will be looking to avoid a slide into tit for tat with both sides losing big time

Selling US debt is a signal rather than a policy and stopping the flow of raw rare earths was always the plan, so China could make and sell the things that require these elements ...

I reckon world recession will be the real cause of pain and the 'trade war' a useful thing to blame.

 

[rblong2us]

heh

https://www.zerohedge.com/news/2019-05-30/malaysia-proposes-launch-asian-currency-pegged-gold

gotta have a dream ...........

 

[pmbug]

...
According to the Malaysian PM, the proposed common currency could be used to settle imports and exports, but would not be used for domestic transactions.

“In the Far East, if you want to come together, we should start with a common trading currency, not to be used locally but for the purpose of settling of trade,” he said at the Nikkei Future of Asia conference in Tokyo. ...

So, exactly like SDRs, but backed by gold. opcorn:

 

[pmbug]

Well well... Looks like the USA is taking the threat of INSTEX seriously:

...
Sigal Mandelker, the Treasury Department’s undersecretary for terrorism and financial intelligence, signaled in a May 7 letter obtained by Bloomberg that Instex, the European vehicle to sustain trade with Tehran, and anyone associated with it could be barred from the U.S. financial system if it goes into effect.
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A senior official involved in the internal debate that led to the letter said the U.S. decided to issue the threat after concluding that European officials, who had earlier downplayed the significance of Instex in conversations with the Trump administration, were far more serious about it than they had initially let on.
...

https://www.bloomberg.com/news/arti...that-its-iran-workaround-could-face-sanctions

 

[rblong2us]

I cant believe the stupidity of threatening exclusion from SWIFT ..........

once theyve blocked everyone from using SWIFT it gets easier and INSTEX gets a leg up

and the US$ becomes less relevant with every sanction / sanction threat.

 

[pmbug]

Instex, a European payment system for barter-based trade with Iran designed to circumvent U.S. sanctions, is expected to be ready soon, German Foreign Minister Heiko Maas said on Monday, ahead of talks with Iranian President Hassan Rouhani in Tehran.
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“This is an instrument of a new kind, so it’s not straightforward to operationalize it,” Maas told reporters, pointing to the complexity of trying to install a totally new payments system.

“But all the formal requirements are in place now, and so I’m assuming we’ll be ready to use it in the foreseeable future.”
...

https://www.reuters.com/article/us-...de-vehicle-before-rouhani-talks-idUSKCN1TB0L0

 

[pmbug]

Even as plans are afoot to launch a digital rupee, India proposes to ban cryptocurrencies altogether, and a law is reportedly in the works that would make holding cryptocurrencies a crime that would put you in jail. RBI has already banned cryptocurrencies. This is myopic. India needs to be open to the possibility of using cryptocurrencies for international payments bypassing the dollar.
...
The US derives much power from the use of the dollar as the world’s principal currency for settling payments between countries. It can borrow as much it wants from the rest of the world and simply print dollar bills to repay the loans. Other countries cannot follow that example. That is bad enough.

Those were innocent times when the US merely profited from global seigniorage. Then, it started weaponising the dollar. The latest example is the Iran sanctions. If any entity transacts with any entity that has transacted with Iran, that is, even indirectly, that entity would be denied access to the dollar payment network.

No bank can afford to be cut off from access to the dollar. So, no bank would deal with anyone that deals with an entity on which the US has declared secondary sanctions. The dollar is a powerful weapon in the hands of the US that it can wield against anyone it wants to. ...

https://economictimes.indiatimes.co...law-cryptocurrencies/articleshow/69933164.cms

It didn't use to be polite to say such things out loud.

 

[pmbug]

French Finance Minister Bruno Le Maire said on Thursday he hoped a special trade channel set up with Iran would complete a first, limited transaction in the coming days.

Set up by France, Britain and Germany, Instex is a barter trade mechanism that aims to avoid direct financial transfers by offsetting balances between importers and exporters on the European side.
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"We want Instex to enter into force in a few days, and I hope that we will be able to operate in a few days. I hope the first transaction will be completed in a few days," Le Maire told journalists at a meeting in Poland.
...

https://uk.investing.com/news/econo...ran-close-to-1st-deal-in-days--france-1910619

Very limited beginning, but if Iran doesn't screw the pooch (EU good will) over violations of the nuclear deal, it could grow in scope.

 

[pmbug]

Russia has said it may join a European Union payment system aimed at salvaging the Iran nuclear deal if it is expanded to include oil purchases.
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In a not-so-subtle reference to the United States, Vladimir Putin's spokesman on Thursday called Instex an “important initiative” to protect European companies from “illegal attempts by third countries to limit their activities”. He said Russia was watching to see how well it functioned.

“With consideration of the initial experience using this system when it is activated, we can't exclude our cooperation in this,” the spokesman said.

Foreign minister Sergei Lavrov, however, complained on Wednesday that Instex was only covering deliveries of food, medicine and other humanitarian aid, “which aren't banned by the Americans anyway”.

To bolster Iran's economy and ensure the survival of the deal, Instex would need to facilitate oil exports as well, he said.
...
The EU has said it would welcome third countries to join Instex but is still deliberating over whether the system should include oil payments.
...

https://www.telegraph.co.uk/news/20...ng-eu-payment-system-meant-save-iran-nuclear/

...
“We’ve been very clear that we expect U.S. sanctions to be adhered to,” Mnuchin said in response to questions from reporters on Thursday in France where he met with Group of Seven counterparts. “Whether it’s Iran or anyone else, if people want to participate in the dollar system people will be obligated to follow the U.S. sanctions.”
...

https://www.bloomberg.com/news/arti...ns-europe-not-to-breach-u-s-sanctions-on-iran

 

[pmbug]

Apparently, the IMF is now the arbiter of the currency markets...

The International Monetary Fund said on Wednesday the U.S. dollar was overvalued by 6% to 12%, based on near-term economic fundamentals, while the euro, the Japanese yen and China’s yuan were seen as broadly in line with fundamentals.
...

https://www.reuters.com/article/us-...rade-tensions-overvalued-dollar-idUSKCN1UC1NH

This is only going to give the Fed political capital to (further) devalue the dollar.

 

[pmbug]

Nice overview of events from the last decade or so (most of which has been mentioned here):

...
Clearly gold is making a remarkable comeback to the world financial system. A new gold standard is being born without any formal decision. At least, that is how Ambrose Evans-Pritchard, an influential international business editor of The Telegraph, described the ongoing efforts by countries to lay their hands on physical gold: 'The world is moving step by step towards a de facto gold standard, without any meetings of G20 leaders to announce this.'
...

https://www.omfif.org/analysis/commentary/2019/july/towards-new-de-facto-gold-standard/

It's interesting to note who published that article...

OMFIF is an independent forum for central banking, economic policy and public investment - a neutral platform for best practice in worldwide public-private sector exchanges.

With offices in London and Singapore, OMFIF focuses on global policy and investment themes relating to central banks, sovereign funds, pension funds, regulators and treasuries. Global Public Investors with investable assets of $33.8tn are at the heart of this network.

Membership offers insight through two complementary channels - Analysis and Meetings. Many OMFIF meetings, held under the OMFIF Rules, take place within central banks and other official institutions. OMFIF Analysis incorporates in-house expertise and specialists from public and private sector members.
...

 

[pmbug]

Trade war between USA and China is shifting to a currency war. Initiate phase 2!

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The yuan blew through the symbolic line of seven to the dollar for the first time since the global financial crisis, with the offshore rate in Hong Kong spiking to 7.07 in moves that stunned seasoned traders.

The calculated action by the People's Bank (PBoC) threatens to unleash a wave of deflation across the world and risks pushing East Asia and much of Europe into recession. It is certain to provoke a ferocious response from the White House.

Capital Economics said Beijing has taken the fateful step of "weaponising" its exchange rate and is digging in for a long struggle: "The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the U.S."

Commerzbank said China's decision to engineer such a sudden move in its tightly managed currency has far-reaching implications for the whole international system. "It looks like a tsunami is coming."
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In case there was any doubt over the motive of today's action, the PBoC issued a statement linking the new rate to "unilateralism and trade protectionism measures and the imposition of tariff increases on China." Despite not naming the U.S., it clearly meant Mr. Trump's latest threat to impose 10 percent tariffs on all remaining Chinese goods in early September.

The PBoC vowed to keep the currency "fundamentally stable" but it is walking a fine line. Capital controls are tighter than they were during the currency scare of 2015-2016 -- when China was losing $100 billion of foreign exchange reserves a month -- but money is still leaking out. Confidence is increasingly fragile.

"The worry is that a break beyond 7 could send the Chinese currency into a vicious circle in which selling leads to more selling," said Ke Baili from Caixin.

Kyle Bass, a long-time China bear at Hayman Capital, said a "mass exodus" of capital is already underway as political protest in Hong Kong reaches crisis point and China's debt-driven growth model reaches the limits. "The collapse has just begun," he tweeted.

Most analysts say the move by the PBoC is a deliberate choice, but that is hardly more reassuring for investors. It means that the Chinese Communist Party is willing to risk a full-blown conflict with Washington on every economic front. Beijing has simultaneously ordered state bodies to halt purchases of all farm products from the U.S.
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Capital Economics said the Chinese appear intent on neutralising Mr. Trump's tariffs by letting the currency slide pari passu, implying a devaluation of up to 10 percent. This means a parallel yuan devaluation against the rest of the world. It effectively exports trade stress to third countries and risks pushing much of East Asia into a deeper downturn.

The eurozone is also in the front line. Hans Redeker from Morgan Stanley said the euro is developing a new characteristic: it tends to strengthen during bouts of global stress. This reflects its role as surplus "funding currency" for worldwide capital flows.

In other words, the euro is starting to behave like the Japanese yen. Currency strength causes pro-cyclical tightening and deflationary pressures whenever there is trouble. This will cause deep alarm in Frankfurt.
...

http://gata.org/node/19308

 

[pmbug]

China took steps to limit weakness in the yuan, providing some stability to global financial markets in the wake of Monday’s rout, and said it won’t depreciate the currency to be competitive.

The People’s Bank of China on Tuesday set the daily currency fixing stronger than analysts expected and announced the planned sale of yuan-denominated bonds in Hong Kong. The moves, which came after the U.S. labeled the country a currency manipulator, helped drive the yuan up 0.2% a day after it sank the most since 2015. The central bank also rejected the accusation it manipulates the yuan.
...

https://www.bloomberg.com/news/arti...-focus-after-china-named-currency-manipulator

 

[pmbug]

Investors should diversify away from the U.S. dollar and increase their exposure to other major currencies and gold, according to a report from JP Morgan.

In a recent market note, the bank stated that it sees the U.S. dollar losing its status as the world’s dominant currency, and consequently depreciating in value.

“There is nothing to suggest the dollar dominance should remain in perpetuity,” the note said. “In fact, the dominant international currency has changed many times throughout history going back thousands of years as the world’s economic center has shifted.”
...

https://www.kitco.com/news/2019-08-06/Ditch-the-Dollar-Buy-Gold-and-Other-Currencies-JP-Morgan.html

 

[rblong2us]

In a recent market note, the bank stated that it sees the U.S. dollar losing its status as the world’s dominant currency, and consequently depreciating in value.

Isn't this what Trump wants ?

 

[pmbug]

I'm not sure anyone really wants or fully understands what it means for the dollar to lose it's global reserve status. But yes, he is advocating for a weaker dollar to boost USA's exports.

 

[pmbug]

Papua New Guinea wants to retain at least 30% of the gold it currently exports as it transforms its economy under a new government leadership, the country’s commerce minister said on Monday.

PNG was the world’s 14th largest gold producer in 2018, according to the World Gold Council. Its assets include the Porgera gold mine, majority controlled by a joint venture between Barrick Gold Corp and Zijin Mining Group , which has a lease currently up for renewal.

PNG’s Minister for Commerce and Industry Wera Mori told an investor forum in Sydney that the resources-rich nation was developing policies to keep more of the commodities it produces in the country to improve its economy.

“We are in the process of developing the framework to retain at least 30% of our gold that we export every year,” Mori told an investment forum in Sydney.

Mori said that PNG would also consider pegging its currency, the kina, to gold, rather than the U.S. dollar.
...

https://af.reuters.com/article/commoditiesNews/idAFL4N25F074

Expect to hear news media promoting stories about PNG being a hub of terrorist activity if this comes to fruition. Sanctions or marines? Flip a coin I guess.