Yuan Ignited Currency Wars Causing Nations to De-Peg from the USD & Reducing Use of USD in World Market Place

The Chinese Yuan has created tremendous volatility in international currencies and currency markets.  In September the Peoples Bank of China (PBOC) purposely de-valued the yuan to:

  • Attempt to stabilize its markets
  • Enable themselves to more easily pay off debt and sell USDs & Treasuries capitalizing on the high value of the USD
  • Eliminate the IMF’s concern that the Yuan was over-valued, as they were deciding whether to add the Yuan to its basket of currencies and to the World Bank’s list of reserve currencies (which the IMF did).
  • Make Chinese exports less expensive and more competitive in the world market place

In the second week of January the PBOC again intervened and lowered the value of the Yuan.  Both times, the world market place, fearing further decline, reacted by selling the yuan and Chinese securities, further lowering the value of the Yuan.  Many nations took actions which lowered the value of their own currencies to stay competitive; this is where you get the term “currency wars.”

The USD strengthened in 2015, because in December of 2014 the Federal Reserve stopped printing money and purchasing bonds, as well as raising interest rates a quarter percent, which they had been talking about doing for two years.  This action is called “tightening,” and caused great turbulence in US and global markets because so many nations have pegged their currencies to the USD and most of their debt is denominated in USDs.   This action   raised interest payments to the US, as well as caused nations to buy more US securities and USDs to maintain their peg.

When the Feds raised interest rates .25% it strengthened the USD, but it made it more expensive for consumers to purchase homes, cars, etc., and for businesses to expand their operations, hire more people and grow, thus slowing growth and expansion of the economy.  The reason a central bank normally raises interest rates is to slow an economy that is expanding too fast and to curtail inflation.  Currently, however, the US has no inflation, retail sales are down, corporate earnings are down, industrial output has shrank, shipping orders are down, our trade deficit last month was the highest on record, our stock markets are preforming poorly.  The only basis for the Fed “tightening” is low unemployment numbers and mediocre low paying job growth; but they completely ignore all the other indicators, and the fact that over 100 million people are on the under-employed list, who don’t have a job and don’t show up in the unemployment figures.

The questions  this raises are: Why did the Fed ignore all the other economic indicators and raise interest rates in a weakening economy, further weakening it and  causing global turmoil… and why do they plan on doing it four more times in 2016?  Currently, Fed Chairman Janet Yellen is getting grilled by other central banks and world economic leaders at the 2016 World Economic Forum in Davos, Switzerland, they want to know why she did it and are requesting she not do it again.  Currently, the Federal Reserve is the only central bank in the world raising interest rates, even those whose economies are currently preforming better than ours are not tightening rates.

More and more nations are de-pegging from the USD, China has just de-pegged, along with many Asian nations, and Hong Kong and Saudi Arabia are about to. These nations are de-pegging because it’s costing them too much to maintain their peg and they want their currency to devalue to make it more competitive in global markets and increase exports.  Regardless of whether the USD remains the internationally designated world reserve currency or not, fewer nations are pegging to it, fewer are trading with it, and fewer USDs are being used in international trade, thus reducing US influence in the global market place.

Many are saying that things are lining up just as they were before the 2008 Financial Crisis, but unfortunately for the US and many other nations, there are some things that are very different and they are not positive.  In the last seven years there has been a dramatic increase of central bank intervention and the printing and devaluing of currencies, as well as a significant increase of national debt.  The use of the USD in trade and the level of reliance on the US by other nations, have greatly decreased in .   These general trends, as well as the specific events below, will  make dealing with the next crisis much more difficult.

  • Most major nations have made trading treaties to directly exchange currencies with each other, bypassing the USD which is the designated World Reserve Currency (WRC).
  • The World Bank added the Chinese Yuan to the list of world reserve currencies used by the nations of the world to borrow and create infrastructure, and the IMF added the Yuan to the Special Drawing Rates (SDR) currency basket: http://www.imf.org/external/np/exr/facts/sdr.htm This will reduce the amount of USDs currently used by the World Bank & IMF.
  • The Asian Infrastructure Investment Bank (AIIB) became fully operational Jan 1, 2016 and the US is the only major nation which is not a member of this bank. The AIIB will compete with the current US controlled World Bank and the USD will not be an underlying currency in any of the AIIB’s loans or financing, thereby further reducing the use of the USD in the global market place.
  • More and more nations continue to de-peg from the USD
  • The US was $3T in debt in 2008, but has now ballooned to $19T in debt
  • Both times the Yuan devalued other currencies went up more than the USD, meaning there is more faith in other currencies like the euro, British Pound and Japanese Yen

These changes reflect a very deliberate move away from the USD and clear concerns about its strength and the strength of the US economy.  These changes will also undoubtedly reduce the use of the USD in the global market place from this point on.

Kuroda Advises China to Impose Capital Controls to Defend Yuan (1-23-16) http://www.bloomberg.com/news/articles/2016-01-23/kuroda-advises-china-to-impose-capital-controls-to-defend-yuan
Goldman’s Cohn Says China Will Probably Have to Devalue Currency (1-22-16) http://www.bloomberg.com/news/articles/2016-01-22/goldman-s-cohn-says-china-will-probably-have-to-devalue-currency
Currency War Revival Is Alive and Well (1-16-16)
http://www.bloomberg.com/news/articles/2016-01-16/currency-war-revival-seen-by-state-street-after-yen-euro-rally
China Fears Rattle Hong Kong Dollar (1-14-16) WSJ
http://www.wsj.com/articles/hong-kong-dollar-drops-sharply-on-china-fears-1452791598
Black Swan Over Hong Kong 32-Year HK Dollar Peg on the Brink (1-20-16)  http://www.bloomberg.com/news/articles/2016-01-20/hong-kong-dollar-holds-near-lowest-since-2007-on-outflow-concern
What Are the Market Risks If There Is More Easing (1-22-16) Bloomberg Video
http://www.bloomberg.com/news/videos/2016-01-22/what-are-the-market-risks-if-there-is-more-easing-
U.S. Stocks Sink With Markets Around the World (1-20-16)
http://www.bloomberg.com/news/articles/2016-01-19/asian-stock-outlook-mixed-after-u-s-equities-dip-to-august-lows
Stock Slump Worsens in Asia as Iran Sinks Crude While Yuan Gains (1-17-16) http://www.bloomberg.com/news/articles/2016-01-17/asian-stock-futures-foreshadow-rout-as-kiwi-slips-amid-oil-slump
Two Technologies that are Revolutionizing the Financial System (1-15-16) SMC https://www.sovereignman.com/trends/two-revolutionary-technologies-that-are-dismantling-the-financial-system-18557/
China’s Choice Devalued Yuan or Increased Stimulus (1-13-16) Bloomberg Video
http://www.bloomberg.com/news/videos/2016-01-13/china-s-choice-devalued-yuan-or-increased-stimulus
Manufacturing in U.S. Contracts at Fastest Pace in Six Years (1-4-16)
http://www.bloomberg.com/news/articles/2016-01-04/manufacturing-in-u-s-contracts-at-fastest-pace-in-six-years
The Trade Wars Begin US Imposes 256% Tariff on Chinese Steel Imports (12-23-15) http://www.zerohedge.com/news/2015-12-23/trade-wars-begin-us-imposes-256-tarriff-chinese-steel-imports

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