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On October 1, the Chinese renminbi officially joins becomes the fifth international reserve currency. Until recently, Washington played geopolitics to defer the renminbi’s internationalization. However, what about Wall Street?
The first US Presidential debate may not sway many voters but has lifted the Mexican peso. The peso, which has fallen by about 1.3% over the past two sessions, has stormed by 1.5% today as the seemingly biggest winner of the debate. Snap polls immediately following the debate gave the edge to Clinton.
The US dollar rose against the major currencies except the Japanese yen last week. It also appreciated against most of the emerging market currencies, with the South African rand, the Brazil real, and the Chinese yuan the notable exceptions.
Summer vacations have mostly ended. The news stream has picked up. Yet speculators have been mostly reluctant to make meaningful changes in their exposure to the currency futures.
There are a few notable exceptions. First, over the past several weeks, speculators have reduced gross short euro positions by more than 20% since the end of July. It stands at 173.3k contracts, after the bears covered 16.7k contracts in the CFTC reporting period ending September 13.
Germany and Japan didn’t want their currencies to go global, fearing appreciation and the resulting blow to their manufacturers’ competitive edge. China, in contrast, seeks to turn the renminbi (RMB) into a major global currency. To do this, it has created a global network of trading institutions, an offshore RMB market that trades outside China’s capital controls and a policy of gradual market opening.
Over the summer, the US dollar was out of favor with the speculators in the futures market. This means that gross long positions increased and gross short positions tended to fall. Speculators are only short three of the eight currency futures we track, the euro, sterling and Mexican peso.
It took the market a few days to overcome the shockingly poor non-manufacturing ISM (51.4 vs. 55.5). However, by the end of the week, the US dollar bulls had regained the upper end. The September Fed funds was implying a yield of 41.75 bp, up a quarter of a basis point from the September 2 close.
On 30 November 2015, the IMF announced that the Chinese renminbi (RMB) was to be included in its special drawing rights (SDR) currency basket. Joining the SDR — the IMF’s chief international reserve asset for member states — meant that the RMB had been deemed ‘freely usable’.
