China Gains Wider Distribution of the Yuan

It looks as though the euro (EUR) is going to have to go through another stretch of beating, from which the single unit will have to tough it out, for sure! Euro weakness this morning, is being driven by a return of Greek debt concerns, and a vote in Finland over the weekend that saw a jump in support for “euro-skeptic” parties… I think this euro reaction has been nothing more than a knee-jerk reaction to what will not amount to a hill of beans in the long run… The Greek debt concern on the other hand, just keeps coming back like that guy Michael in the Halloween movies! Just as scary too!

I’ll tell you something right here, right now that you won’t see reported on the news, or by your regular newsletter writer… But, if you’ve heard me talk about China’s goal of obtaining a wider distribution of the renminbi (CNY), you know that I center the thought on their “currency swap agreements”… Remember, these agreements allow the two parties involved to exchange currencies when settling trade between the two countries, which means, they remove dollars from the equation… So, what China does, is spread renminbi around the world, and remove dollars… Thus eventually making the dollar irrelevant with regards to “terms of trade”…

Well… The latest country to “sign up” with China is New Zealand… That now makes most of Asia, Belarus, Argentina, Brazil, and New Zealand, as countries that have signed these agreements with China… It’s just the beginning, folks… But don’t just let this news slip by, for in less than 10-years, people will look back and wonder how the renminbi became so well distributed, and widespread in operation… But you won’t! Because you read the Pfennig!

And then I read this…

One of the central points at a recent summit of leaders of Brazil, Russia, India, China and South Africa was a need to realign the global order imposed at the end of World War II that put the US dollar at the center of the world’s financial system, according to The Economist. The biggest of the emerging economies, the BRICS, doubt the value of sticking with the dollar as the world’s reserve currency. “Representing around 40% of the world’s population and nearly a quarter of its economic output, the BRICS countries would seem to be well justified in calling for these kinds of changes,” the magazine noted.

OK… The dollar is back to rallying this morning, although the ranges aren’t exactly wide by any stretch of the imagination. And it looks like it across the board this time, with even the Swiss franc (CHF) selling off versus the dollar. Gold and silver, after having very strong moves on Friday, are looking like they will see some profit taking when the US markets open.

You know… There’s one currency that has been ticking stronger versus the dollar in the past week, and it will surprise you, for there’s no real reason for this currency to be rallying, especially now… The Japanese yen (JPY) continues to get some love from the currency traders, and the fact that there’s probably still a bit of repatriation of yen going on, as investors in Japan find the going more rough than they originally thought.

I see that Fed Chairman Big Ben Bernanke is going to be speaking today… I would bet a dollar to a Krispy Kreme that Big Ben is going to attempt to calm the waters that were stirred up last week by the Hawks… Yes, your Fed Heads like Fisher and Hoenig, who spoke very hawkishly about ending QE early last week, will see the Fed Chairman try to speak louder about the need to keep stimulus in place…

Look, I don’t like the Fed, period… And when they are singing from different song sheets, they look ridiculous! And… For them to make comments to the markets, like Fisher and Hoenig did last week, to get the markets thinking way ahead of itself, is just not responsible… And then Big Ben, saying that he believes the inflation pressures we’re seeing are just “transitory” is again irresponsible!

Speaking of irresponsible Fed Chairmen… I see that Big Al Greenspan was giving his two cents worth on the deficit… Let me remind you before you read what Big Al had to say, that his track record even going back to his days before being a Fed Head, is horrendous! During his Senate confirmation, years ago, one senator told him that he had never seen someone make so many bad calls, but they confirmed him any way… UGH! So… Big Al thinks that the “Bush era tax cuts should be allowed to expire, and put the rates back to where they were during the Clinton Administration.”

Thanks Big Al… Not sure we asked for your help…

Last week I told you that a recent communiqué by the European Central Bank (ECB) had indicated to me that the rate hike from earlier this month was the first in a series of rate hikes, even though ECB President Trichet wouldn’t admit to that… Well, now we have ECB Ministers coming out with comments about the rate hike, and they are all singing from the same song sheet, saying, “conditions are too accommodative.”

OK… Back at the beginning of March, I was telling you all about the rebuilding in New Zealand, and giving recognition to Hazlitt’s broken window… But, I was telling you even though economics would tell you otherwise, that historically, we see currencies gather steam at these times… Well… Then on March 18th (while I was in Florida) kiwi (NZD) hit 72 cents… Ever since then it has been on a steady climb upward. In fact, the price chart looks like stair-steps to the attic for kiwi! Go figure! I thought it would be good for kiwi, and voila… It was!

China raised its reserve ratio for banks again this past weekend, in yet another attempt to squash their rising inflation pressures. By raising the reserve ratio for banks, it basically takes money out of the system, which means banks there can’t use it to loan to borrowers, thus reducing the money supply… China has done quite a bit already to put a lid on inflation, but the inflation pressures keep rising… Which just means that more rate hikes, and reserve ratio hikes are on the docket for China…

Then there was this… From Zero Hedge, Bloomberg, and my good friend Dennis…

Tipping points are funny: for years, decades, even centuries, the conditions for an event to occur may be ripe yet nothing happens. Then, in an instant, a shift occurs, whether it’s due [to] a change in conventional wisdom, due to an exogenous event or due to something completely inexplicable. That event, colloquially called a black swan in recent years, changes the prevalent perception of reality in a moment. This past week, we were seeing the effect of a tipping point in process, with gold prices rising to new all time highs day after day, and the price of silver literally moving in a parabolic fashion. What was missing was the cause. We now know what it is: per Bloomberg: “The University of Texas Investment Management Co., the second-largest US academic endowment, took delivery of almost $1 billion in gold bullion and is storing the bars in a New York vault, according to the fund’s board.

To recap… The dollar is back to rallying this morning, after being slammed by the currencies, gold and silver on Friday. China was in the news a lot this past weekend, as they raised their reserve ratio for banks, and vowed to bring more inflation cutting measures to the markets. China also signed a currency swap agreement with New Zealand, thus removing dollars from trade between the two countries. And the surprising Japanese yen is the only currency on the “green side” of the ledger versus the dollar this morning…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning