World Already Looking Ahead Of USD Christopher Laird April 2, 2009
China currency swaps
A number of big changes are developing right now under the radar of the USD' future. China is presently arranging $96 billion worth of Yuan swaps with its trade partners who are running short of USD to pay export/import bills. (A currency swap is where they trade X amount of currencies at the going foreign exchange rates).
The purpose of China's move is to enable these trade partners to pay in Yuan, should they run short of dollars in this USD deleveraging world.
China stated they are taking these steps to reduce the reliance on the USD. China has been making noises recently that are more than mere expressions of dissatisfaction. The IMF proposals for a 'super sovereign' currency (not run by one country like the US) are supported by China as well.
Other countries, like Russia and many trade partners who were running out of USD in the last year and a half are also getting on the bandwagon for a new currency alternative.
But most important, is the emergence of real steps to replace the USD in more and more areas of commerce in the world. Granted, de linking from the USD will not be easy for anyone, but, the fact that actual practical implementations are happening now raises interesting questions.
But the USD is 'strong'
Why is the USD strong relatively, yet major trade partners are looking for alternatives? Well, a major reason is that all the markets, stocks, bonds, etc are deleveraging, and that means that so much is denominated in USD that there appears to be unlimited demand for dollars- which is why the Fed has done $hundreds of billions worth of currency swaps with Europe and Asian central banks - to cover that over the last year and a half.
So, the USD short squeeze is forcing people into dollars to liquidate, but, it's also forcing trade partners who are running out of dollars to pay for USD imports/exports to scramble.
Hard evidence of post USD plans
Now, if a trade partner like China is already making agreements with its world trade partners to swap Yuan so trade partners can pay in Yuan if they want… that is definite hard evidence the Chinese are looking ahead, and preparing to de link from the USD, even if its going to take a while. This tells us a much about the future intentions of China - ie they already see the need for alternatives to the USD and are making practical moves to start on this.
April 2 (Bloomberg) -- China's leaders, increasingly concerned about the nation's $740 billion of U.S. Treasuries, are making it easier for trading partners and consumers to do business in yuan.
The People's Bank of China has agreed to provide 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency- swaps. More such arrangements are being planned so importers can avoid paying for Chinese goods with dollars, the central bank said. In Hong Kong, which has pegged the currency to its U.S. counterpart since 1983, stores from Park'n Shop supermarkets to jewelers accept yuan.
Chinese officials are using the Group of 20 meeting, which begins today in London, to call for reducing the dollar's role and the creation of a new global reserve currency. Premier Wen Jiabao has said he's concerned that a weaker greenback will erode the value of China's Treasuries as the U.S. tries to spend its way out of the longest recession since the 1930s.
"China has learned from this financial crisis that we must reduce reliance on the dollar and promote the yuan as a regional or international currency,"
Bloomberg.com
Gold dilemma
With gold again testing $900 and threatening to go below, gold fans wonder what the heck is going on. Well, we mentioned that as long as this USD short squeeze is with us worldwide, these two problems will remain for out trade partners; One, they will continue running out of USD and have to swap more currencies to meet the deleveraging and demand for USD.
Two, they are already making arrangements for alternative currencies in bilateral trade with their own partner countries - like China swapping what looks like is going to be $hundreds of billions worth of Yuan swaps set up around the world. Preparations for alternatives to the USD are already well underway, if not dominating yet.
See this as a preliminary round for USD devaluing in a year or two. It's not like the USD is going to tank tomorrow, but the preliminary steps are already being taken, in this case by China, to arrange some post USD trade currency alternatives. Look ahead; this is practical action that will pay off later when/should the Chinese get more aggressive banging on the USD.
But, moving back to USD deleveraging, that is going to keep the USD stronger than one might think for a while. This is actually very deflationary - deleveraging in all markets and the corresponding USD strength.
Which means that gold fans need to look ahead to the next stages, and not the immediate problem of this deleveraging which is rallying the USD to when we get into phase two of the developing USD story, not a story about deleveraging, but what happens after this deleveraging is finished.
Evidently, the USD rally caught most everyone (not us), astute to average investor, to underestimate the USD.
Now, with the G20 meeting, the ECB making key interest rate decisions, and lots of talk about an IMF USD alternative, and China setting up big currency swap agreements, and the general worries about the ever present credit crisis - there is so much going on right now its hard to predict where gold will be in three weeks.
But, looking ahead, it's not hard to predict that the USD is due for a big correction in the coming year or two. What I am wondering is will the USD correction lead in a year's time to a halving of it, or is this later, say several years out?
I also think that a whole lot of investors worldwide are asking that question too, and are not decided about that, and so far gold has recently held $900. Gold can lose $900 and go lower and still indicate the flight to safety is alive and well. So, even a lower gold price will not indicate anything major yet that gold is going to take a dive. Really, we are going to have to wait a bit and see how the world economy plays out in the next 6 months. If there is no recovery going on, the prospects for a meaningful stock turnaround are zero.
If there is a big world stock rally, that will cause both gold and probably the USD to weaken during that period (anti deleveraging). That can cause a general commodity mini boom. But I expect this will not last.
And, if world financial markets do give up in a short while, that will be deflationary for the general commodities, to include oil. Gold so far has escaped the worst wrath of the general commodity collapse. Even if these markets rally this year, I think the general commodity rally right now will be short lived.
*************************************
at http://www.gold-eagle.com/editorials_08/laird040209.html
