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.
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.
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’.
The US dollar was already trading with a heavier bias before the shockingly poor service ISM. The August non-manufacturing ISM tumbled to 51.4, a six-year low, from 55.5 in July. Markit, which does its own survey, showed a smaller decline in its August read to 51.0 from 51.4 in July. This was up slightly from the preliminary 50.9 estimate.
Since late July, I have been looking for the Australian dollar to turn lower. Instead, the Aussie has continued to climb. It has risen in ten of the past eleven weeks. As this Great Graphic, created on Bloomberg, these gains have brought the Australian dollar toward a three-year downtrend line drawn off the April 2013 and the June-July highs from 2014.
This Great Graphic was created on Bloomberg. I use it to illustrate a possible head and shoulder pattern that has been carved by the US dollar against the yen. Head and shoulders patterns are most often regarded as a reversal pattern.
Some purists may insist this is always the case, yet many technicians recognize that on a rare occasion, the head and shoulders pattern can point to the continuation of the existing move.
Today is anniversary of the final blow to the dollar-gold standard. By August 15, 1971, the exchange of dollars for gold was limited to central banks, and US President Nixon unilaterally ended it. There was a brief attempt to resurrect it with new parities that failed, and thus beginning the current era of floating exchange rates.
