Dollar Up, Yuan Down

A cura di Walter Snyder, Swiss Financial Consulting

Forex traders will have surely noted the downward trend of the renminbi. At the same time the US dollar has reinforced its position. In fact President Trump has complained that a strong dollar practically nullifies any beneficial effects that might result from the imposition of tariffs on imports. A strong dollar likewise makes it more difficult for American companies to export as their products will be more expensive for foreign buyers. In addition foreign countries may place tariffs on US goods in the course of the ongoing trade war.

So it seems that traders shorting CNY and going long on the USD at least very short term should be able to profit from current trends. The question arises as to how far the PBoC is willing to let the yuan fall in view of the insistence of the Fed on raising interest rates two more times in 2018 and continuing to trim their balance sheet, which logically implies a higher dollar. It is also interesting to consider how the Chinese intend to make the renminbi an important international reserve currency.

It is known that the Chinese, Indians and Russians have been acquiring physical gold in large quantities and that the gold price has recently gone down to as low as $1,220 thanks to the BIS. This means that it is cheaper for the gold bugs to buy physical gold than it has been since January 2018. So the idea that a strong dollar means a lower gold price seems to hold. Buy low, sell high!?

In this context it would be interesting to know what sort of long-term strategy the PBoC has worked out for its plan of promoting the Chinese currency on the global stage, which means displacing the US dollar. The US has followed a policy of large trade deficits, increasing federal debt and putting lots of dollars in circulation, for example, by means of QE. The result has been a de facto devaluation of the US dollar over the last fifty years. In 1966 a dollar was worth four Swiss francs while it is now worth barely one Swiss franc.

It may be that China has chosen to create a lot of debt and issue lots of renminbi in order to enlarge the monetary base as part of its plan to promote its currency. At a certain point the Shanghai oil exchange is going to have an effect on dollar use in the oil sector, and the Shanghai gold exchange keeps an accurate record of how much physical gold is being traded. It is not presently clear how China plans to create a gold-based currency, but having some physical gold in one`s portfolio is advisable. Shorting CNY also looks like a good bet.

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