We have all, grudgingly or not, observed the massive depreciation of the US dollar in recent months. It has fallen against all other majors and many of the EM currencies as well. It has fallen against commodities, against gold, simply against pretty much everything. One does wonder why though. Isn’t the US economy firing from all cylinders? Isn’t Donald Trump attracting heaps of foreign funds and investments into his country? By all logical arguments, the dollar should actually increase in value.
But it hasn’t. Instead, it is being actively talked down by the current administration. In an unprecedented move Treasury secretary Mnuchin called for a lower dollar in Davos, a view that even Trump did not immediately correct. His pledge of a stronger dollar in the long run was nothing but lip service and in keeping the tradition of US presidents to support the greenback. We do know what he really thinks, however, and it’s in line with what Mnuchin called for.
As I have picked up in the grapevine, from serious people who are believed to be in the know, the propaganda war to debase the dollar hasn’t ended. I hear targets of 1.40 against the Euro, 95 against the Yen, and 5.50 against the Renminbi. Whether these off-market targets are realistic is a different matter, but for Washington to have such vision is disturbing. No to mention that it serves up numerous problems for the incoming Fed chair and his monetary policy going forward.
In most of these cases, the other side of the equation can’t do much but look on. Mario Draghi may well be aghast by such rhetoric, as it has driven the Euro into territory much less competitive than previously and may endanger the blossoms of the eurozone recovery. The Bank of Japan’s policy is at its most accommodative already and has few options to divert from such US push. What are they going to do? Call America out as the biggest currency manipulator of them all?
The one currency area that has the means to withstand the pressure is obviously China. The Renminbi is still a managed currency by all definitions, and the PBoC can reign into any significant trends they deem disadvantageous to their economy. This was impressively displayed early last year when the ghosts of capital flight had the Renminbi zoom in on 7 against the dollar. To be sure, the mainstream media again wrongly called for China’s implosion, but monetary authorities in Beijing took the challenge in stride.
Now, we are in an opposite scenario. In the past 8 months, the Renminbi has appreciated by almost 10% against the dollar, in January alone by just shy of 5%, in line with the other majors. The FX has literally crashed to a 6.28 handle in recent trading sessions, last seen 3 years ago. So the question is… why hasn’t Beijing reacted and at least softened that fall? Isn’t the still gargantuan current account surplus to be protected? Hasn’t the PBoC always intervened, as it has been allergic to such FX volatility?
Well, it may be less of a mystery than we think. As far as I have heard from my sources, and the vertical move would confirm it, Beijing is less troubled these days than one would think. Maybe it is a pragmatic move in the wake of belligerent Washington talk on trade. Maybe it is the perception that, on a trade-weighted basis, the appreciation is less outrageous and fair. Maybe the PBoC is disciplined and keeps to their Yuan measure against a basket of 13 currencies, which dilutes the dollar trend somewhat.
In any case, while the balance of payment was a concern a year ago, people tell me that in past few months it was even slightly positive, leading to a need for the PBoC to sell Renminbi and buy other currency denominated assets. So, the next question is… why haven’t we seen this in currency and foreign reserves? Well, US Treasury holdings measured by TIC are being published with a 2-month delay, and we might prepare for that number having gone up again.
But equally, when thinking about it I could not help myself but drawing another conclusion. The gold price jumped by 10% in the past 6-7 weeks. There hasn’t been any comprehendible reason for this to happen, apart maybe the inflation bulls to drum it up, but seriously… The money system is perceived to be sound, monetary normalisation is on course, the economy is humming despite a potential over-hyping of things, and the stock market has been on fire. Gold should be softer rather than anything else.
So, what’s wrong? Well, if I was a surplus nation with excess reserves, would I incrementally stock up on dollar-denominated assets even in light of a potentially grand plan out of Washington to debase the greenback? Of course not! And if the gold portion of my reserves were only 2% and at the bottom of any comparable numbers, would I use my Renminbi to stock up on gold? Of course I would! I guess we will only learn from the official reserve holding reports at a later stage…
Has Beijing learned a thing or two from Moscow in this respect? Remember my
post on Russia from two weeks ago, commenting on their renewed increase in total reserves but not in US Treasuries. Any excess has been channelled into propping up gold holdings. The value of Russia’s gold has topped 76.6 billion dollars, another all-time record high, which constitutes a significant 18% of the total. An interesting aspect is that Russia now holds approx. 1,900 tons, more than China officially owns.
Consider that China’s GDP is almost 10 times Russia’s, and you will see the imbalance I am referring to. And as you will remember, this space has always argued that China holds way too little of gold in reserves for the sheer size of its economy. Maybe Beijing has finally woken up to that fact and redirected surpluses to the gold market. The recent rise in the gold price would certainly be in line with such move.
