This remains one of my favorite Great Graphics that illustrate the divergence theme that I think is the main driver of the euro-dollar exchange rate. Composed on Bloomberg, it shows two time series. The first (white line) shows the German two-year yield minus the US two-year yield. It bottomed near -80 bp in mid-October and slid persistently through last Wednesday to hit reach almost -138 bp.
The market’s disappointment with the ECB unleashed pent-up corrective forces in the foreign exchange market. This leg up in the dollar began in mid-October. Through the day before the ECB, the euro was the weakest of the major currencies, losing 7.5% against the dollar. The yen and sterling shed a little less than half as much. The Australian dollar was the only one of the majors to have gained against the dollar. Even then, its 0.12% appreciation had only been achieved here in December. Similar, tendencies were evident in parts of the debt mark
Adding the renminbi in the IMF’s basket is the first step in opening up the world’s elite reserve currencies to emerging economies.
Currently, the International Monetary Fund’s (IMF’s) basket of major reserve currencies has only four members: the US dollar, the euro, the British pound and the Japanese yen. However, things are about to change now as the IMF’s Board has accepted the membership of China’s renminbi in its elite basket.
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
This Great Graphic was composed on Bloomberg. It shows two time series. The yellow line shows the premium the US pays over Germany for two-year money. The white line shows the premium the US pays over Japan for two-year money.
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.
