Chinese Renminbi to Become International Currency?

When I signed off on Friday morning, the currencies were enjoying a very nice rally, which remained in place the rest of the day. The Consumer Income and Spending data was very much as I describe it would be, and so there was no surprise for the markets to deal with. You may recall, that I told you that Spending would be greater than Income, as the “Cars for Clunkers” probably had something to do with the Spending be so much stronger than the Income piece…

The currencies ran into a speed bump in the overnight markets though… When I checked the Japanese market last night, stocks were rallying on the news of the election results. The ruling party was voted out, and a pro-consumer driven growth party was put in… But, I guess what turned this around overnight was the fact that while the opposition party in Japan ran on a platform that promised change, when the dust settled, there are many questions… And when there are questions about leadership, risk assets don’t fare too well… And thus, the reversal of the currency rally.

So, as we all know, the trading pattern of the last 9 months… When risk assets don’t fare well, the dollar and Japanese yen do… And vice-versa. Yes, even though Japanese stocks sold off overnight, the yen was in play. It’s just some strange phenomenon that has a grip over the markets for 9 months…

It will be interesting to see if the opposition party in Japan will actually change the way the Gov’t does business… And if it does, what kind of “change” will take place. One would hope for the Japanese economy that it lifts the economy from the doldrums that have hung over the Japanese like the Sword of Damocles for a very long time now… That’s right! We’re not talking 2-3 years, not 5-6 years, not even 9-10 years… Japan’s problems go back to the early 90’s… YIKES!

Every time, the economy would attempt to pull itself up by the bootstraps the Japanese Gov’t would introduce some sort of stimulus, and burden its Gov’t with more debt… I know it sounds familiar… And I long ago told you all that the U.S. was following Japan’s steps, but hoped that the U.S. would not take 15 years or more to reverse their steps… Unfortunately, those hopes and dreams are taking a beating!

Which is why I questioned the reappointment of Big Ben Bernanke last week. The leader of the Fed Heads, has really, in my opinion, stepped in the doggie dookie and followed the Japanese even though he said he wouldn’t! My friend Bill Bonner had an interesting thought about Bernanke’s reappointment… “Obama picked him to continue as head of America’s central bank, the Federal Reserve…even though his predecessor, a Republican, appointed him.”

I know, I know, the media is making Big Ben out to be the “savior of the world” right now… I suggest we all wait-n-see if all that he’s done really does “save the world” or if it just masks the problems, and they come back even worse in the near future… If I were a betting man, I would put money on the latter of those things.

I noticed a story on the Bloomie this morning that says “The Federal Reserve will be unable to prevent the Trillions of dollars in Government stimulus pumped in the U.S. economy from stoking inflation later this decade, according to a survey of business economists.”

They didn’t ask me… But I would have been all about that idea!

In fact, I think the cartel, I mean the Fed Reserve will have to accept the fact that inflation is growing at first, because they 1. won’t recognize its beginnings, and 2. won’t have the guts to raise interest rates, and remove quantitative easing at the first signs of inflation, because the economy’s recovery will be nascent at best. So, a higher level of inflation will have to be accepted by the Fed… And unfortunately, you and me!

OK… Let’s stop talking about the Fed, they make my stomach turn any way!

When I got home last night, I was reading a story that really got me thinking… The story was about how China has gone from Exporter to Importer. The story explains that the stimulus that the Chinese Gov’t put into the economy this year, has really spurred consumer demand, and exports from South Korea jumped 26.6%, Taiwan 41%, Japan 30.2%, and the European Union 23.5%…

The idea here was that the Chinese Gov’t wanted to reduce their dependence on the U.S. consumer… You see, from my vantage point, the Chinese Gov’t has done their part in curbing the global imbalances that used to exist, and I used to rant about almost every day! Now the trick is to see if the domestic demand can really take off from here now that the stimulus has, well, stimulated the economy! And did you see where China announced that they are going to begin to build light trucks? Putting people to work making things… Wow! What a concept! It’s what made the U.S. economy powerhouse that it once was…

The South China Morning Post had a very interesting story in it this morning regarding the Chinese renminbi becoming an international currency. Let’s go to the tape! “Vice-Premier Wang Qishan has been put in charge of a task force to make the renminbi (yuan) a currency for international trade. The recession has encouraged Chinese officials to speed up the currency programme. As the downturn erodes U.S. influence, China is losing faith in the dollar and sees the time coming for the renminbi to become a major world currency.

The renminbi is not convertible for purely financial purposes, ruling it out as a reserve currency for now, but China has started to carve out a bigger international role for it, beginning with the currency swap agreements China has put in place.”

SEE! I TOLD YOU! I TOLD YOU that was what China was doing when it signed those currency swap agreements with 6 different countries, and is currently working on ones with Brazil and Thailand! China was gaining a wider acceptance for their currency… Slowly but surely (who’s Shirley?) China was begin to provide convertibility to the renminbi, and then and only then will it be picked up by currency dealers all around the world! It’s all happening right before our eyes folks… Don’t close your eyes, this won’t go away by closing your eyes!

Staying in Asia… The Indian GDP surprised on the upside when it printed last night… A 2nd QTR 6.1% rise in economic growth VS last year, is a very good performance for India. The rupee has been hanging around a corner for the past couple of months, so maybe this kind of news will attract foreign investment once again, and drive that currency higher VS the dollar…

You know… The data that printed in the U.S. last week, wasn’t half bad! In fact, as long as you don’t want to turn it over to expose the rot on the underside, you might begin to feel as though the economy is recovering… Unfortunately, there is that rot on the underside to deal with… Therefore, I’m pinning my colors to the mast of a “W” shaped economic future… I know Chris talked about this while I was in San Francisco, and gave all his reasons for his thoughts… So I won’t go over them again… But just to say that the rot on the underside of the economy is what leads me to think this…

The data cupboards all over the globe will get a workout this week… There are 2nd QTR GDP’s to print, Manufacturing Indexes to print, Jobs Jamborees, and Central Bank meetings… So, the currencies won’t have to take their only direction from stocks! The currencies will bet taken in so many directions this week, which is why I’m saying right here, right now, that this will be a very volatile week… This Friday will be interesting in that, a lot of the “big boys” on currency trading desks will be gone to add a day to the Labor Day Holiday weekend, and volume will be thin, but Friday is also a Jobs Jamboree Friday…

The sell off that I saw going on in the currencies when I first began writing this morning, has picked up steam… But still, not a strong sell off just yet…

One more thought for today… The U.S. 10-year Treasury Note yield has fallen in the past week, which means there had to be some buying of the note to drive up the price (remember, with bonds, when the price goes up, the yield goes down, and vice-versa). You don’t think it could be more Fed buying do you? I have my suspicions for sure!

The Daily Reckoning