Special Drawing Rights and China's Keen Interest to Join the Club

Sometimes the mountain peak is clearer from the valley than from the summit.  It may be easier to understand the changes in China’s currency regime if we take a step away and try to look at the big picture.  To find our path we need to clear away some undergrowth that is distracting us from rigorous analysis.

With China’s economy slowing and exports weak, a devaluation could be a way to restore economic vigor.  Many accounts in the western financial press tried placing the depreciation of the yuan in this context, but it is mistaken.

London Says Yuan for the Money

Of the world’s two largest international financial centers, London is warming up to the renminbi, but Wall Street is running behind.  Recently, the former mayor of New York City Mike Bloomberg congratulated President Barack Obama and President Xi Jinping for a number of economic steps, but in particular “advancing a mechanism to trade the Chinese currency in the United States.”

Down Under Dollars, and other Major Currencies, are Pressuring the U.S. Dollar

The US dollar fell against most of the major and emerging market currencies for the second consecutive week.  The combination of market positioning, weak confidence that the Fed will hike rates this year, and the rise in some industrial commodities, seemed to be the main drivers.  Technical considerations warn of scope for additional dollar losses in the coming sessions. 

The Canadian Dollar Gains Steam

This is the sixth consecutive session the Canadian dollar is appreciating.  The US dollar reached an 11-year high on September 29 near CAD1.3460.  Today it traded to almost CAD1.2970.  There have been four main drivers of the Canadian dollar advance. 

First, the Canadian economy contraction that persisted through the first part of the year ended with renewed growth in June and July.  Investors understood this as an indication that the Bank of Canada's two rate cuts this year likely completes the mini-easing cycle. 

Current Currencies, Fed Speak Continues and Draghi Goes to NY

The US dollar begins the fourth quarter on a mixed note.  The dollar-bloc currencies are trading higher, helped by stabilizing commodity prices and the slightly better than expected Chinese manufacturing PMI (49.8 vs 49.6 expected after 49.7 in August).  Australia's manufacturing PMI also ticked up to 52.1 from 51.7.  Sentiment toward the dollar-bloc has improved.  Technically, it looks like the Antipodeans and the Canadian dollar put in near-term bottoms.

Bitcoin Upends the Definition of Money

When you begin to delve into the question of what money really is, you must prepare for some metaphysics. Money, currencies, and other such media of exchange differ markedly in their backgrounds and means of operation, and have changed quite recently into forms that are barely understandable.

Lingering Rate Hike Potential and Dollar Strength

The US dollar rose against all the major and emerging market currencies over the past week, save the Russian ruble, which gained about 1.5%.  Comments from several Fed officials, and most notably Yellen, drove home the message, which arguably was diluted after the FOMC meeting: A rate hike this year is still the most likely scenario.  This helped bolster the greenback.

Conflicting Goals and Interests Stymie the Renminbi's Path to Float

There are conflicts among the many objectives shaping China’s exchange rate policy. Politically, China’s leaders are keen on having the renminbi become a major international currency. For this purpose, the renminbi needs to be strong and stable enough that others will use it to settle trade balances and as a reserve currency. The People’s Bank of China’s (PBoC) near-term objective is to get the renminbi into the International Monetary Fund’s basket of elite currencies — the Special Drawing Rights.

Currency Movement after the Fed No-decision

The US dollar sold off in response to the Fed's lack of action, but it rebounded to close firmly before the weekend.  For the week as a whole, it was mixed.  The Australian and New Zealand dollars were the strongest of the majors, advancing 1.3%-1.4% against the greenback. They extended those gains on Friday, even though the dollar was firmer against most of the other majors.

Interpreting the Renminbi Devaluation

The verdict on China’s recent currency devaluations differs depending on to whom you listen. To some, the devaluations are either a positive and responsible step in the direction of a more market-determined exchange rate and a liberalised financial system. To others, they are potentially destructive; beggar-thy-neighbour competitive devaluations intended to prop up declining GDP growth by unfairly boosting exports.