Renminbi Reserves?
The Dollar debasement debate hasn’t finished but should now take a breather whilst some stability has been restored to the currency. A combination of the nomination of Kevin Warsh, as we noted yesterday, as well as some robust US data are to thank for that recovery. To note here whilst on the subject, an enduring hangover from the government shutdown last year appears to be due to deprive the market of key labour market data on Friday. Non-farm payrolls data due for January will be postponed once again leaving a key statistic absent at a crucial time for the Dollar.
At a time of comparative vulnerability for Dollar valuations, publications yesterday of China’s ambitions to achieve reserve currency status came to the fore. This supposed ambition isn’t a new phenomenon and in fact despite the publication by President Xi in the communist party’s ideology journal on Saturday, the comments were actually from a speech made over a year prior. The contention from China yesterday that its Yuan might serve as a reserve currency in place of an ailing Dollar therefore reads more as an element of political timing than a contention for a viable new economic reality.
Our view is that despite value destruction always being a possibility for any currency in an open market, the Dollar’s status as a safehaven is unlikely to change anytime soon. The flows that have undermined the Dollar this year and last do not pertain to those obtained from its reserve currency status. They’re a combination of hedging flows from investors and a reflection of political and monetary risk. The market’s reaction to Kevin Warsh so far has been Dollar positive. However, the road is far from certain for a Federal Reserve Chair whose primary ambition is likely to be to limit the scope of the central bank he may be to preside over.
Discussion and Analysis by Charles Porter
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