The Problem With the Global ‘Dollar Short’ Is the ‘Short’ Far More Than the ‘Dollar’

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The latest developments from China’s monetary realm were the IMF’s inclusion of RMB into its “reserve” basket, and at a proportion greater than either the pound or yen. None of that is surprising, however, nor is it truly meaningful as a practical matter. The change is more of an official stamp upon what transpired long ago, with little bearing on how the world of today actually functions. For some, it signifies the desire on the part of the Chinese to push international finance toward a non-dollar future, but China will both have to survive economically that far as well as upend four decades of deeply entrenchedcredit-based global finance to do so. Unless and until Chinese banks and their proxies can supply that credit globally, this is merely symbolic.

In addition, and some have related it to the IMF inclusion, the PBOC announced that the yuan will no longer be referenced solely in “dollar” trading. Again, symbolism is the greater part of the move as the PBOC doesn’t get to make the global rules unilaterally.

China’s central bank signaled its intention to change the way it manages the yuan’s value by potentially easing its loose peg to the U.S. dollar and instead letting it track the currencies of its broader trading partners.
In an editorial posted on its website Friday night, the People’s Bank of China said the yuan’s exchange rate would be better measured against a basket of currencies rather than the dollar alone.

If CNY were readily negotiable or the economy fully self-contained, then monolithic declarations would be operative. Instead, the world functions, again, in a credit-based “dollar” regime under the eurodollar standard.

As we have seen of late, CNY is being pushed around by the eurodollar leading to severe internal CNY (and CNH) consequences. By referencing other currencies in defining the trading band for CNY the PBOC is not asserting newfound confidence or renewing old complaints, it is living by the eurodollar math; more accurately, it is attempting to deal with it as it runs out of fruitful options. The simple math there explains (subscription required) what is more so an act of hopeful desperation.

ABOOK Dec 2015 Asian Dollar