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U.S.-China trade dispute: Will China Weaponize the RMB and U.S. Treasury bonds?

U.S.-China trade war: collateral damage

Consider the soy bean. 'China is threatened retaliatory tariffs on U.S. soybeans. The U.S. is one of the largest producers of soybeans. If China's not going to buy them, we're going to have an excess capacity.'

  • 'So, last week, we saw a soybean selloff.'

'But there was a complete dislocation in whole soybean supply chains. Downstream products, like soybean oil, didn't move at all in the same way.'

1. Will China Weaponize the RMB and U.S. Treasury bonds?

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‍Source: Reuters                                                                                                                                                                                                          

Bob Savage of TRACK says: 'In its talks about tariffs with the U.S., China appears to be discussing - in addition to, of course, to preventing other U.S. goods from coming in - two retaliatory measures to persuade the U.S., "You don't want us to do this,"':

  1. 'Devaluing the RMB'
  2. 'Selling U.S. Treasuries.'

1. Devalue the RMB. Devaluation is 'one quick way of making up for how tariffs hurt you.'

  • 'But, that currency movement could be very ugly if the Chinese wanted it to be.'
  • 'If China destabilized its currency, this would wreak havoc on the order of inflation and cause even more market volatility.
  • 'In the end, 'the aims of the U.S. tariffs would backfire.'

But, for China it would also create, 'plenty of new problems, so China would not to want to do that.' Devaluation would:

  • 'Promote the idea that there's an outflow of capital.'
  • Panic markets. 'Destabilizing the RMB could panic some of the money that has been found a home for the rich Chinese in their stock market, or in their property market, or even in the nascent bonds market.'
  • Cause a round of devaluations. 'If China's devaluing its currency, other countries are going to have to devalue their currency.'
  • And, 'destabilizing the currency reverses a lot of the goodwill that Xi is trying to promote with the rest of the world.'

2. Selling U.S. Treasuries. 'As we know, China is one of the largest holders of the U.S. Treasuries [see the chart, above].

  • 'And, in China, there has been open discussion, even before the proposed tariffs, as to, "Why are they investing in those Treasuries?"'
  • Some argue, 'Treasuries are not really doing a lot for China other than being a placeholder for U.S. dollars.'
  • 'One Chinese government adviser this week even talked about selling Treasuries and investing more in 'One Belt One Road' or in other ways that help the rest of the world.'

Higher U.S. interest rates. 'If China sold even a tenth of its bonds, interest rates on the benchmark U.S. Treasury 10-year bond could inch beyond the 3% level.'

  • With the annual U.S. budget deficit about to top $1 trillion and the Fed pulling back, this would create a bearish bond market, pushing U.S. borrowing costs higher.

But, as rates sharply increased, the value of China's remaining Treasuries would, in turn, tank, and China would lose billions.

2. Markets whipsawed...consider the soybean 

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Both China and the U.S. are clear about they want from their respective trade agendas. Bob Savage of TRACK says:

  • For China, 'more U.S. exports of intellectual property wrapped around technology.'
  • For the U.S., 'a much smaller trade deficit with China, spurred potentially by selling them more cars, maybe a little bit more commodities, and a lot more junk, like U.S. movies or other intellectual property. And, we would love to have Fidelity, or BlackRock, and Goldman have offices all over China.'

'Those things are going to take a lot of time.'

  • 'In the interim the markets are moving up and down on every release about whether the trade discussion is going well or not.'

Consider the soy bean. 'China is threatened retaliatory tariffs on U.S. soybeans. The U.S. is one of the largest producers of soybeans. If China's not going to buy them, we're going to have an excess capacity.'

  • 'So, last week, we saw a soybean selloff.'

'But there was a complete dislocation in whole soybean supply chains. Downstream products, like soybean oil, didn't move at all in the same way.'

  • Why? 'Because the talks are going on and off so quickly. One day we're talking to each other, and the next day we're threatening each other.'
  • 'So the truth is, you have an order for soybean oil, it doesn't matter:  you have to deliver it, and you can't short that stuff.'
  • 'The fact is, to fill the orders, you're going to need soybeans to make soybean oil, so all you're doing is creating windfall opportunities for these processors to take some of these commodities and play off of them.'
  • 'Eventually, the net result is going to be inflation.'

'This highlights the problems with a market that's speculating on the success and failure of the bravado of two big countries talking loudly to each other about what they want in their trade agendas.'

3. U.S.-China trade war: collateral damage

Bob Savage of TRACK: 'My favorite saying relating to the trade dispute is an African proverb, "When elephants fight, it's the grass that suffers."'

  • 'When powerful nations are conflicted, the weak ones suffer the most, so it goes for the market reactions to the US and China rumpus over trade.'
  • 'The countries that are going to be hurt most by a prolonged U.S.-China discussion about trade, leading perhaps to even more minor skirmishes over tariffs and tit-for-tat actions are emerging Asia and many of the allies of the United States.'

'So, the rest of the world is looking less sure and less happy over the fight. There are unintended consequences to this U.S.-China squabble because trade reflects the integration of global businesses into a complex supply chain.'

'German carmakers are an example of losing out.'

'Germany exports cars to China, but most of them are German-branded cars made in the United States.''So, Germany would be hurt almost immediately if China slaps tariffs on U.S. autos.'

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'The two biggest losers are Canada and Mexico thanks to NAFTA.'

More losers: 'Korea and Japan are deeply integrated into the manufacturing processes in China of high-end consumer products like smartphones.'

  • 'They export, for example, integrated circuits that go into products like smartphones.'
  • 'China then assembles the imported parts into finished products.'
  • 'And, these products are shipped to the U.S. as 'Made in China.' 

'This is the outcome of bilateral trade disputes in globalized world economy.'

  • 'We're far more developed than the mercantile world of the 15th and 16th centuries.
  • 'And that's why economists are up in arms - we're well beyond this.'

4. Beyond trade

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‍'Those who cannot remember the past are condemned to repeat it.' George Santayana.  

'Economists have been arguing against trade wars since the 1930s.

  • 'The fear of a further rise in protectionism is a clear downside risk to global growth and an upside risk for inflation.'
  • 'We may be forcing the Federal Open Market Committee (FOMC) to respond to U.S. loose fiscal policy and tighter labor markets with rate hikes that also reflect a splintering of the global trade rules set after World War II.'

'This rumpus isn’t a child’s game even though it appears to have a tit-for-tat quality to it.'

  • 'Beyond trade fears remain real economic doubts as the push for growth to drive up inflation hasn’t been convincing in places where demographics, technology and excess capacity hold (Japan, Europe, and some Asian Emerging Markets like Korea).

'The other geopolitical stories have taken a backseat to the headlines but perhaps will show up in markets again with...

  • 'Hungary re-electing nationalist Orban as PM – highlighting the ongoing splintering of EU politics.'
  • 'Syria continuing with gas attacks – highlighting the inability of the world to control war crimes or bring peace with a corrupt leader.'
  • 'Hamas continuing with protests in Gaza.'
  • 'Germany suffering another terror act as a van plows into a crowd in Munster..'

'Perhaps the most important story from last week and for the week ahead is in the fear for markets – it’s reflected in US stocks, not in bonds or foreign exchange (FX).'

  • 'The lack of FX reaction to the ongoing political noise is notable but understandable in the context of 2016-2017 when central bankers successfully counteracted political events like Brexit or even the election of Trump.'
  • 'Whether that continues maybe the key to understanding risk events for the rest of April and for 2Q.'

'It requires a great imagination to hope that this all ends well. I'm not sure it will. But, until then there are two things that we're going to have':

  1. 'Increased volatility in currencies, especially in emerging markets' and 
  2. 'Increased nervousness over interest rates.' 

5. Sort of surprising U.S. & China trade numbers

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‍Source: Reuters

Bob Savage of TRACK: 'The trade war theme is still far more in the front of traders and investors fears than some larger conflagration in Syria.' 

'U.S. total trade deficit up $57.6bn – worse than the $56.5bn expected.'

  • 'But, China's trade surplus with the US fell to $15.43 billion, below the $20.96 billion level of February.

'The China trade data today was the big release with exports lower and imports holding.'

  • 'China March trade flips to deficit of $4.98bn after surplus of $33.75bn – worse than +$27.2bn expected – first deficit in 13-months.'
  • 'Imports up 14.4% year-on-year;  exports fell 2.7% over the same period.'
  • 'Most of this can be linked to the noise of the Chinese New Year.
  • 'But not all. 'China is in the midst of its own transformation from investment led growth to domestic consumer focus.  This isn't about trade tariffs but the needs of the Chinese people.'  
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How Trump's tariffs impact China's trade/currency relations with Japan & Korea

China markets update with TRACK's Bob Savage

'The currency markets are embroiled in trying to figure out whether the Trump tariffs on steel and aluminum are good or bad for the U.S. economy and the U.S. stock market.'

Peter Navarro, along with Wilbur Ross, won the tariff debate. Dr. Navarro, a few years ago, wrote Death by China, where he lays out his arguments why the U.S. must confront China on trade, currency, business, and the rest.

And, to drive the point home, he also made a one hour and 20 minute long movie. The few seconds from the film, below, will give you the flavor of Dr. Navarro's thinking.

‍From a movie, 'Death by China' made by Peter Navarro

But, with the steel and aluminum tariffs, he seems to have missed his target. China doesn't export a lot of steel to the U.S., although by shipping through third countries, it does supply more than the official numbers indicate. You just can't trust Chinese data.

Whether you agree with the proposed tariffs or not, the tariffs have gotten the attention of the markets. Yet, one that hasn't received a lot of press is the currency market.

So, I invited experienced forex trader and markets expert Bob Savage, CEO of TRACK,  to explain how the tariffs are affecting the currency market generally and China and Asia more specifically. 

1. The 'Trump Risk Premium'

‍The Trump brand means 'premium'

Bob Savage, CEO of TRACK, explains: 'The currency markets are embroiled in trying to figure out whether the Trump tariffs on steel and aluminum are good or bad for the U.S. economy and the U.S. stock market.'

'Just like other markets, in the foreign exchange context, the dollar already has a "Trump risk premium" built into it.'

  • 'In forex terms, the "Trump risk premium" is measured by how much higher our real rate is than the rest of the world's.'
  • 'The G7 real rate in Europe is negative, the G7 real rate for Japan is negative, but for the U.S., it's positive.'
  • 'That indicates to me that no one has faith that we are going to pay our bills or that this president means what he says.'

'How much the U.S. president is supported abroad is a measure that we all want to try to correlate to how it affects markets.'

  • 'The U.S. is a special case because we need about $400 to $500 billion of foreign money to fund ourselves.'
  • 'Otherwise we have to do it internally, and that requires a shift in our savings mechanisms -  we would have to force Americans to buy their own bonds.'
  • 'Instead, we force other countries to buy our bonds.'

'The petrodollar argument of the 1970s is a classic example, where the difference between Trump and Reagan may well be in that recycling of U.S. dollars abroad.'

  • 'Because we have big trade deficits, the money has always traditionally gone back to the United States in funding our budget deficits.'
  • 'This is not the case when you have a negative view of U.S. growth and a negative view of how the world is going to react to U.S. deficits.'

2. Trump's tariffs: a coup China soft power

Bob Savage, CEO of TRACK, believes 'China's going to try to do a couple of things with the U.S. tariffs.' 

'One is defensive - making sure that this doesn't hurt them competitively.'

  • 'China doesn't officially import a lot of steel and aluminum to the U.S.,  But, its trading partners Korea and Japan do.'
  • 'So, Korea and Japan could be tempted to make a traditional reaction to tariffs - devalue the currency. And, China will use its reserves to buy Yen and Won to head that off.'
  • 'I note, though, that Korea and Japan's steel and aluminum exports to the U.S. aren't really big enough to justify devaluation, but the issue still needs examination. More later.'

'Two is public relations - using the tariffs to try to win the mantle of the good player in Asia and the international arena, to show that they're not retaliatory and reactive to U.S. noise, but instead very thoughtful, and plodding, and fair in their way. All to the U.S.'s disadvantage.'

  • 'In Asia, China has already been working to position itself as the 'good player,' as, for example, becoming, the go-to provider for capital in emerging markets, expanding the One Belt One Road and their new infrastructure plans there, and so on.'

 'All this certainly is putting Asia in a tight spot.'

  • 'They don't feel that the U.S. is offering them anything.'
  • 'They don't feel like China is perhaps the right player to go to, but it might be the only choice.'
  • 'If I'm reading Beijing correctly, the leadership in China would like to offer Asia and the world an alternative to U.S. hegemony to Trump's madness. And, the tariffs play right into China's hand.'  

3. The RMB-Yen & RMB-Won relationship...it's complicated

Bob Savage, CEO of TRACK, says: 'When it comes to Asia, these tariffs are really difficult to put your head around, because they affect Korea, they affect Japan, and their trade relations with China are incredibly important.'

  • 'Therefore, I'm looking at how the Renminbi-Yen and Renminbi-Won relationships trade.'
  • 'Especially, how China manages the Won and Yen to the Renminbi, and whether this is its preparation for a harsher game ahead.'

'If you look at the chart of Won and Yen, below, they've broken out.' 

  • 'The Yen is considerably stronger. If you were just trading this on a technical basis, if you were going, "I want to be long Yen and short Renminbi."
  • ''Korea is not quite the same game, but it certainly is no longer a game where Korea gets a free pass because of North Korean worries or a new government.'

'Both of those countries need to see that they can't competitively devalue to gain any market share at all.' 

'In this case, Japan and Korea wouldn't want to devalue anyway because steel isn't a huge part of their export path. It's really about autos.'

'But, it makes a point here about the traditional way of dealing with tariffs, and this is the key point: what do tariffs really mean? How do you deal with a tariff, if you're a country? There's two ways.'

  • 'One is you substitute a product.'

'Or, two, you devalue your currency to make up for the tariff.

  • 'Here's what I mean. I'm in Japan, and I get slapped with a 25% steel tariff, and my steel happens to be (but, in fact, is not) what is in demand for high-end products, and the United States is using it.'
  • 'Well, then you're going to try to devalue the currency to give your companies a competitive advantage to make up for the disadvantage of the tariff.'
  • 'But, now it looks like that game isn't going to work.'

'The reason why devaluations probably don't work for emerging markets or the G7 currencies this time around is that China is going to be able to use its reserves to buy those currencies and prevent them from weakening too quickly.'

  • 'We've seen China this year actively buying Korean Won and Japanese Yen along with the euro. This was originally taken as a sign of China's displeasure with holding U.S. assets'
  • 'But, it is also a larger game of trying to live in a world where China is trying to manage its currency and how it trades against a 24 other currencies.'

'In this case, Japan and Korea are being told by China, "You're no longer going to be given a free ride to devalue when you have an economic hiccup," because it has an immediate impact upon China.'

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China's trade surplus up, RMB weaker

China markets update with TRACK's Bob Savage

'The RMB did not like the trade data at all, and it weakened immediately - over 1% today.' 'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.

February 8: China market moves 

TRADE

In January,
  • China's trade surplus fell to $20 billion from $50 billion, year-on-year, and
  • Imports skyrocketed 35 %, year-on-year, shocking market watchers.

RMB

The RMB ell over 1% today.
  • The most it's traded off since August of 2015 devaluation.
And the RMB has been trading below 6.30 now for over a week, even traded briefly at 6.25 
  • 'Many see 6.20 and 6.25 as very important levels because that's the August of 2015 devaluation - from there you had the  August 2015 2% devaluation that unsettled world markets,' according to Bob Savage of TRACK.
Why the weakening? Three reasons, Bob says: 
  1. 'The RMB did not like the trade data at all, and it weakened immediately.'
  2. 'The news overnight that HNA had a technical default.
  • 'The lenders to HNA - Deutsche Bank being probably one of the largest - were immediately under the scope.'
  • 'Deutsche Bank shares were hit overnight, and the euro was hit because the banking sector in Europe was under the gun.'

'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.

Specifically:
  1. China's falling trade surplus and
  2. The Renminbi's weakening on the trade news and on the news of HNA's credit technical default.
Part one: trade

'There's an obsession with watching what goes on with Chinese trade. China trade is a barometer for global demand for goods. Any change in that trade balance is an indication that something's changing there.'

'And, China's falling trade surplus shocked people. In January, China's trade surplus fell to $20 billion from $50 billion, and imports skyrocketed 35 %, year-on-year. There are two explanations for it.'

 'First is the more boring seasonal effect of the Chinese Lunar New Year holiday, where people realize they'll need goods over February and March but that they're going to be on holiday for a lot of February -  so, they better just get the stuff in in January. Some of the imported goods came that way.'

  • Interestingly, 'a lot of theses imports are in commodities and, strangely enough, that just means that Chinese inventory holdings of commodity goods went up.'
  • That turned commodities prices bearish today. 'People saw that the Chinese bought a lot of commodities in January, and it means that they're not going to buy a lot in February or probably March as they draw down those inventories.'
Second - and more important in the long run for its potential impact on China's current account - is this.
  • 'Overall there's been a 3-1/2% appreciation of the RMB against the dollar.' That's made imports cheaper.
  • 'And guess what the Chinese did? They imported more goods, because they felt richer.'
  • 'Now, the United States knows a lot about how when you make consumers feel richer with cheaper imports: they import more goods and the trade deficit gets worse.'
  • Why is this important? 'China wants to stoke domestic demand,' to become a consumer-driven economy.
  • But it succeeds, this 'has an implication for whether or not China continues to be a current account surplus country.'
  • If China is 'truly successful in creating domestic consumer demand - like that in Europe, Japan and the United States - then, it's probably going to start running a current account deficit, unless it actually targets trade.' 

1. Part one: why China's trade surplus is down

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‍I said trade surplus, not 'Trading Places'

'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.

Specifically:

China's falling trade surplus andThe Renminbi's weakening on the trade news and on the news of HNA's credit technical default.

Part one: trade

'There's an obsession with watching what goes on with Chinese trade. China trade is a barometer for global demand for goods. Any change in that trade balance is an indication that something's changing there.'

'And, China's falling trade surplus shocked people. In January, China's trade surplus fell to $20 billion from $50 billion, and imports skyrocketed 35 %, year-on-year. There are two explanations for it.'

'First is the more boring seasonal effect of the Chinese Lunar New Year holiday, where people realize they'll need goods over February and March but that they're going to be on holiday for a lot of February -  so, they better just get the stuff in in January. Some of the imported goods came that way.'

Interestingly, 'a lot of theses imports are in commodities and, strangely enough, that just means that Chinese inventory holdings of commodity goods went up.'That turned commodities prices bearish today. 'People saw that the Chinese bought a lot of commodities in January, and it means that they're not going to buy a lot in February or probably March as they draw down those inventories.'

Second and more important in the long run for its potential impact on China's current account - is this.

'Overall there's been a 3-1/2% appreciation of the RMB against the dollar.' That's made imports cheaper.'And guess what the Chinese did? They imported more goods, because they felt richer.''Now, the United States knows a lot about how when you make consumers feel richer with cheaper imports: they import more goods and the trade deficit gets worse.'Why is this important? 'China wants to stoke domestic demand,' to become a consumer-driven economy. But it succeeds, this 'has an implication for whether or not China continues to be a current account surplus country.'If China is 'truly successful in creating domestic consumer demand - like that in Europe, Japan and the United States - then, it's probably going to start running a current account deficit, unless it actually targets trade.' 

2. Part 2: how far will will the RMB weaken?

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'Part two is about the Renminbi today and is the more important story today.'

'The RMB did not like the trade data at all, and it weakened immediately, falling more than 1% -  even though the official rate setting China does every morning suggested that the RMB would, instead, be slightly stronger today.'

'This is the most it's traded off since August of 2015. There are two other reasons for this, besides the trade numbers.'

'First, the news overnight that HNA had had a technical default.'

'The lenders to HNA - Deutsche Bank being probably one of the largest - were immediately under the scope.' Deutsche Bank shares were hit overnight, and the euro was hit because the banking sector in Europe was under the gun.'

Second, the Chinese were looking at where the renmimbi has traded - it's been below 6.30 now for over a week, and it looked like yesterday it was trading at 6.25 for a brief shining moment.'

'This is important because many see 6.20 and 6.25 as very critical levels.'Why? 'Because that's the August 2015 devaluation level -  and from there you had the 2% devaluation that unsettled the world.''It is also important because that's the also level where many thought that Chinese export competitiveness was under threat by a too strong RMB.'

'So, after the trade number and after the HNA default, which is emphasizes the need for cheap money for the rollover debt, the issue is that RMB weakness is now putting in a floor below 6.30 -  that something the market is going to really watch closely.'

'And, if we think that the RMB could go to 6.40 or 6.50 again, then that has implications for the rest of the foreign exchange world, particularly Korea and Europe.'

What to watch for. 'Today was an exciting day. I'm paying a lot of attention to see if 630 is the new bottom for the dollar-RMB relationship, and to see if there's going to be more concern about:

'Higher interest rates, and 'Debt rollover of some of the more leveraged corporations in China.'

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China's RMB oil futures exchange—the 'story of the year'!

‍The Shanghai International Energy Exchange:blowing up more than oil

There's a lot to follow in China. And, I had missed reports about the opening of the Shanghai International Energy Exchange or INE, likely this quarter. But, during my interview with Bob Savage, the well-respected analyst of global markets and CEO of TRACK, he told me the INE could be the 'story of the year.' That's a big - and interesting - claim about something that seems like one more ho-hum Chinese entity. Bob explained that the INE will create the an RMB-denominated oil futures contract. The first such contract in a petrodollar world, where China is largest crude oil importer. If RMB oil contracts - even just for trade with China - catch on, then the whole global oil trading regime will change. And, given the massive size of the global oil trade, a shift from dollars to RMBs will both erode the dollar as a reserve currency, and push the RMB closer its goal of becoming a full reserve currency.

1. China's new RMB oil futures exchange - the 'story of the year'!

Watch for the opening of The Shanghai International Energy Exchange - acronym: INE - this quarter. 

'Story of the year' and 'game changer' are what Bob Savage, CEO of TRACK and member of our soon-to-be launched China Analyst Network, calls the INE. And, the impact goes way beyond oil to bolstering the RMB's challenge to the dollar.

About the INE. The INE will offer the first oil futures contract denominated in RMB, instead of U.S. dollars.

  • Chinese buyers will lock in oil prices and pay in RMB, instead of U.S. dollars.
  • Oil producers will be able to sell oil to China - the largest oil importer - in RMB, instead of dollars.
  • And, the INE will establish a third oil price benchmark (after the WTI and Brent) in RMB, instead of U.S. dollars.
  • (note: the 'RMB, instead of U.S. dollars' - that's crux of what follows.)

The INE sounds a little ho-hum until Bob explains its impact on the relationship of commodities and currency: 

  • The last time the world saw a reserve currency change was during World War Two when the dollar formally replaced the British pound as the universal medium of global exchange in the 1944 Bretton Woods Agreement.
  • But the de facto change began 'after World War One, when more and more contracts started to be denominated in dollars instead of pounds. And, that played a part in the dollar's replacing the pound as the world's reserve currency.' 
  • 'The question to ask is: Will the U.S. begin to see an erosion of its reserve currency status when more and more contracts start to be denominated in RMB?' 

'Already, the open interest of the commodity contracts listed in Shanghai in Renminbi far outstrips anything in the rest of the world's commodities futures in commodities combined.' 

  • 'What we're beginning to recognize is what has de facto already been the truth: that China's import of a huge proportion of the world's commodities changes the way currencies work.'

'As more trade becomes denominated in Renminbi and more futures contracts become denominated in Renminbi, then the Renminbi becomes a more viable alternative to the dollar, and prices begin to revolve around whether the Renminbi, not the dollar, is holding its value or not.'

Enter the INE. 'The denomination of oil futures contracts in Renminbi exemplifies the role of commodities in the geopolitical fears about the dollar weakness and about the role of China in that weakness.'

  • This is why the opening of the INE could 'exacerbate the dollar weakness story because it's an example of the dollar continuing down the path of eroding its reserve status.'

After the INE opens, watch:

  • 'How much volume it does and how quickly it expands.'
  • 'How many other countries start denominating oil contracts with China in Renminbi. The Saudis have said they might. The Iranians already do. The Russians already do. But, if OPEC, as a whole, starts to denominate both in dollars and Renminbi, it's a game-changer.'

 

'For all these reasons, the opening of the Shanghai International Energy Exchange, the INE, could be the biggest story of the year.'

  • 'The impact might not happen dramatically or immediately, but over time, over maybe the next five years, the opening of the INE could be seen as crossing the Rubicon.'                                                                                                                                                                                                                      

2. U.S. inflation in an RMB world

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‍That twisty thing is the RMB after it replaces the dollar

Bob Savage, CEO of TRACK, riffed on U.S. inflation if we one day lived in an RMB world.

If the RMB moves toward replacing the dollar, then 'the locus of attention about inflation, particularly global inflation, will change from 'what is the policy of the Fed?' to 'what is the policy of the People's Bank of China?' - and, to what is the value of the Renminbi rather than what is the value of the dollar.'

  • 'It really moves U.S. inflation from being under Fed control. 
  • Instead, 'you have to keep an eye on Chinese demand for commodities. That will set the rates for a lot of commodities that we're dependent upon.'
  • 'And, if Chinese demand sets the rates, the currency relationship with China will likewise matter to the U.S. in a much more dramatic way.'

'If China sets the commodities rates, U.S. inflation from imports will be more dramatic.

  • 'Up until now, import inflation in the U.S. has been muted because we are blessed with lots of commodities of our own. And, the pricing of those commodities on a world market has never really been part of the story because everything that we buy and sell has been denominated in dollars.'
  • 'But, if we start pricing those commodities in RMB terms, then that exchange rate becomes terribly important to the Fed.'
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