Currencies

  • The demise of the SDR with yuan inclusion has been greatly exaggerated.

    Yuan SDR Inclusion is a Sino the Times

    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.

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  • How will the yuan shift the capital balance of the SDR basket?

    Potential Repercussions of a Yuan-Inclusive SDR

    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

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  • The dollar recoups its loss to the Swiss franc post cap removal.

    Dollar to Swiss Franc: I'm Back

    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. 

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  • SDR inclusion really offers no tangible benefits inside the IMF.

    You're Almost in the SDR; So What's Next?

    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’.

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  • The Canadian and US dollars have bee drifting apart in 2015.

    More on the U.S.-Canadian Divergence Meme

    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.

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  • Are dollar-bloc currencies knocking on the dollar's door?

    Catching Up with the Greenback

    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.

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  • Aussie dollar technicals are perhaps weaker than the fundamentals.

    The Down Under Dollar

    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.

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  • The euro, the yen, and the options market.

    Option Implied Volatility as a Market Insight Indicator

    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.

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  • Bad for the dollar, not so much for the euro, with the RMB in the SDR.

    The Renminbi as a Reserve Currency Appears Inevitable

    The IMF will decide this month whether to make the Chinese renminbi the fifth international reserve currency. For the euro, that would not be a win or lose game.

    Behind the facade, there has been much debate about the inclusion of the Chinese currency – the renminbi (RMB) – as the fifth international reserve currency.  Initially, Beijing hoped that, after the International Monetary Fund’s (IMF) long-anticipated November meeting, the RMB could become part of the international currency basket by 1 January 2016.

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  • As the dollar strengthened, speculators increased shorts on other currencies.

    Gross Short Currency Futures Rise off of Dollar Strength

    There were three significant speculative gross position adjustment among the currency futures in the Commitment of Traders reporting week ending November 3.  They were all expanding the gross short positions. Speculators added 30.9k contracts to lift the gross short euro position to 207.2k.  It has risen by 69k contracts in the past two weeks.

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