Chicken Little’s Global Currency Reset
The internet is a great source for information. But it can also be confusing when events are blown out of proportion. This weekend was China’s Currency Effective Date for Inclusion into IMF’s SDR. Chicken Little had a field day. So let’s try to mop up the mess, so we can focus on the REAL issues to focus on.
A little background: China requested to be included in the IMF’s Special Drawing Rights in 2010. The IMF said they would review their request at the next IMF meeting in 2015.
Ahead of the IMF’s December 2015 meeting, China was told their request would be re-addressed well ahead of the next meeting. In February 2016 the IMF decided to include China’s currency into the Special Drawing Rights (SDR), effective November 1, 2016.
What’s A Special Drawing Right?
Special Drawing Rights (SDR’s) are used by the IMF as a temporary means of helping nations meet their obligations in times of tight credit. Last week, the SDR is a basket of four currencies: USD, EUR, GBP & JPY. Over the weekend, the Chinese Currency was added to the basket.
Briefly, the IMF Requirements for a Countries currency to be considered for addition into the SDR are:
- Significant global trade with a wide array of trading partners
- A freely Tradeable & Liquid currency that is widely used.
- A liquid capital market: from a eurodeposit market to Government and corporate bonds
- A Central Bank balance sheet that can provide instant liquidity
- A Central Bank’s balance sheet also needs to have an amount of gold, designated by the IMF and scaled to the size of the countries economy.
- In addition to gold & currency, reserve status is typically conferred to countries with active bond markets in their home currency as well as the currency of their trading partners.
- N.B.: Another reason why China sold US Government Securities and bought bonds from other countries. They needed to lessen their focus on trade balance and focus on having a diverse Central Bank Balance Sheet.
The Global Currency Reset (GCR)
While Global Currency Reset GCR was likely a poor choice of terminology in these days of heightened anxiety, the additional of the Yuan (the tradable offshore Chinese currency) and the Renmimbi (the onshore Chinese currency) was, in fact a Global Currency Reset with respect to the effective date for inclusion in the SDR. But this doesn’t mean reptilians are vying to own the world’s currency or that the earth is flat. Oy!
Here’s what the new Basket will look like when the market open this evening:
The SDR includes CNY as well as RMB so 10.92% doesn’t surprise me terribly – for now.
Caution is King
Having said all of this, there are other issues taking place with respect to the TPP (Trans-Pacific Partnership) & Debt Burden Liberation that have rattled the West’s nerves. Some of the concerns are reasonable. Asia, China in particular has always been a lockbox concerning financial dealings. If you Google Debt Burden Liberation I don’t see any high profile authors doing a write up on SwissIndo (the organization which is supposed to run the DBL for Indonesia). Perhaps later tonight or tomorrow one of the major banks or analysts will do a write up and I’ll let you know.
I don’t see the addition of the CNY & RMB into the SDR as a yawner. I think reviewing your risk management strategy over the next few hours is a good idea. But let calm heads prevail. One cannot hope to make cogent decisions if your brain is consumed with fear.
With the US Elections 2 days away, most people have been in a risk-off position anyway. But I’ll leave your risk management to you and other’s smarter than me to determine how tomorrow will look. (I’ve got my Magic 8-ball at the ready however). It’s a gorgeous fall day here in New York. Life is too short to be consumed by things one cannot control.
One of the bloggers suggested people stockpile food (something you can control). So I ordered a Dozen Junior’s Cheesecakes, 10 quarts of Chicken Soup & 4 dozen Latkes from 2nd Avenue Deli and my husband went out to get a case of guitar strings.
Then, we’ll put on Led Zeppelin III, crank it up to 11 (for you Spinal Tap Fans) and enjoy the reset of the day.
That’s all for now… Nama-stay-away-from-silly-blogs.