The International Monetary Fund will begin using the yuan as a reserve currency. The yuan weight will be 10.92 percent, after announcing that it sees the yuan as a “freely usable” currency, allowing it to join the euro, pound, yen, and U.S. dollar in the IMF’s Special Drawing Rights basket.
It is official. The Chinese yuan will be in the SDR. At a 10.4% share, it is a bit more than I expected, but less than the 14%-16% share that the IMF staff has intimated a few months ago. This is a significant event, even if there is no short-term market opportunity.
The yuan’s exchange rate against the dollar has steadily declined over the month of November contrary to conspiracy theories that warned Chinese officials would devalue the yuan only after it joined the SDR. It is did not wait.
Recently, the International Monetary Fund’s staff and its chief Christine Lagarde suggested that the yuan should join the basket of international reserve currencies (the Special Drawing Rights, or SDR). Expected approval of the inclusion is likely to come at the IMF board meeting on Nov 30.
It would make the yuan the first currency of an emerging economy to be included in the basket. In addition, it could unleash three waves of capital inflows into the Chinese currency.
Three waves of capital inflows
The US dollar recorded its high for the year against the Swiss franc on January 14 near CHF1.0240. It closed that day a little below CHF1.0190. The next day the Swiss National Bank surprised the world by lifting its cap against the euro. The dollar plunged to nearly CHF0.7400.
On 13 November 2015, the IMF’s Managing Director, Christine Lagarde, released a statement that an IMF Executive Board meeting will come on 30 November to decide whether to include the Chinese reminbi (RMB) in the Special Drawing Rights’ (SDR) valuation formula. She said, ‘IMF staff assesses that the RMB meets the requirements to be a “freely usable” currency and, accordingly, the staff proposes that the Executive Board … include it in the SDR basket’.
The Canadian dollar is more than a petro currency. It is also subject to the same forces of divergence that have lifted the US dollar more broadly. Since the beginning of the year, the US two-year yield has risen 26 bp while Canada’s two-year yield has fallen almost 39 bp.
This Great Graphic, created on Bloomberg shows two time series. The yellow line is the US dollar against the Canadian dollar. The white line is the two-year yield spread.
The US dollar broadly consolidated its recent gains over the past week. Data and officials mostly confirmed what most investors had already anticipated. The Federal Reserve is most likely to hike rates in the middle of December. The ECB will most likely ease policy further just shy of two weeks before the Fed meets. The Bank of Japan is in no hurry to step up its already aggressive asset purchase program.
After nearly two years of lobbying, the Chinese government finally learned this week that its currency would be part of the International Monetary Fund’s special group of world currencies. Its currency, the renminbi, will now join a short list of the world’s top currencies in the International Monetary Fund’s basket of top currencies that also include the U.S. dollar, the Euro, the British pound, and the Japanese Yen.
This Great Graphic, created on Bloomberg, shows the recent price action of the Australian dollar. For the past month, corrective upticks have held a trendline. It comes in near $0.7150 today and a little below $0.7115 by the end of the week.
The latest leg down for the euro began in mid-October when the single currency met a wall of sellers in front of $1.15. Draghi’s dovishness at the press conference following the October 22 ECB meeting sent the euro toward $1.11. The contrasting hawkishness of the Federal Reserve, where the FOMC statement on October 28 specifically cited the next meeting, pushed the euro to $1.09.
