The Currency King

The dollar started the big rally in July last year and are getting stronger and stronger. The dollar Index Spot (DXY) is now trading at 94,7450. Up 0,31% today. It`s been a safe heaven so far while the precious metal is still in the bearish market, struggling to break out from its downtrend. Will the dollar remain strong?

It`s all about the world of global payment were one currency is growing, and it has increased in global payment over the last two years. The change in percent is +266%! That marks the distance between the currency and its leaders. What currency is that?

Stack of $100 bills

According to BIS (Bank for International Settlements), it has moved from No 13 where it accounted for 0,6% of the global payments. Now, it`s up to No 5 with 2,2% of payments of the same currency. What about the leaders? At the end of 2014, 40,2% of global payments were in euros and 33,5% of the payments were in U.S dollars.

A big distance up to the leaders which is 1,827,3% up the Euro and 1,522,7% to the U.S dollar. That`s not gonna happen any time soon, and the government doesn`t want that to happen anyway I think. The currency I`m talking about is yuan of course. Or…..

Many things can happen in this world, You`ll never know. Game-changers can be Ukraine, Russia, Greece or Fed`s interest rate hike to name a few. Historically, we know that currency shares could shift rapidly, as it did between the world wars. What we see happens in Europe now is not good.

If the demand for the yuan goes up it will kill the Chinese economy and their growth will stop. Chinese exports comprised 26,4% of Chinese GDP in 2013, according to World Bank. Five years ago it was 26,72%, so it haven`t changed much. This why it is important for China to control their currency, because a rising demand for yan would affect their export and make them sell less products to the rest of the world. They can`t afford that because selling their products is important for them.

But what about the U.S citizens? When the demand for a currency increase, the value of the currency will go up. Just like the dollar since July last summer. It`s good for the consumers in the country with the rising currency because they can buy foreign goods at a cheaper price.

On the other hand. It`s not good for the businesses in the country with the stronger currency because they will sell less of their goods to other countries, because their goods cost more when they are priced in other currencies.

This is a double-edged sword that makes this issue a political hot potato right now.

All the central banks are talking about this issue right now, and the Chinese government pegs its currency to the U.S dollar. In an effort to stabilize is exchange rate, everyday China sets the official rate at which yuan can be traded for dollars. The yuan is allowed to fluctuate within a 2% band around the official exchange rate.

This combination of a peg and a floating rate is meant to allow market forces to work, and not go overboard. The Chinese allow flexibility, but only on their terms, and that takes us back to the issue of a rising currency.

Export is very important for China, and if they want yuan to rise in global payments, they need to make yuan more available for foreign entities. But a rising demand for Chinese currency on the world market would lead to upward pressure on the exchange rate for yuan, which the Chinese government controls. Many people blamed China for being a currency manipulator a few years ago, but that would World Trade Organization set a stop for.

A rise in yuan will hurt the Chinese export, which account for a quarter of their GDP.

To make it worse. Once sufficient amounts of yuan were available away from China, more of their currency would trade outside of their governments control. Offshore yuan trading already occurs. In this unpegged environment, the yuan is free to move against other currencies based on market conditions without constraints.

More offshore trading will make the Chinese governments to lose control over the exchange rate, and thereby lose the ability to set one of the most important components of its very large export business.

While the Chinese might rail against the U.S dollar from time to time, and might even talk about how the yuan should occupy a more prestigious place among world currencies, it makes little sence for a country that uses a command economy to turn control of its currency over to international forces.

The yuan will not be the worlds currency leader tomorrow or anytime soon.

 


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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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