August 2015 will be remembered in history when China put the Federal Reserve, and America, in check. It will also mark the global currency war entering its final and most destructive phase.
China devalues Yuan in Global Currency War
Comparable in scope to Nixon taking the USD off the gold standard, on August 11th, 2015 China cut the monetary cord with the dollar. On that fateful day two weeks ago, China devalued the yuan approximately 3%, sending global markets into a tailspin they’ve yet to recover from. Forex experts dubbed China’s recent move as the first step in de-pegging the yuan from the greenback.
* Six months ago we warned China would pull a move like this. Click here to read our Weekly Volume China Prepares for War from February of this year.
By devaluing the yuan 3% on August 11th, and then another 2% within a few days, the Chinese government made its boldest, most aggressive geopolitical move against America in over 20 years. And it has put the Fed into a very dangerous position.
You see, China pegged the yuan against the dollar for competitive reasons. If the Fed were to devalue the dollar, which most believed was its intent since the 2008 financial crisis, the yuan would follow suit and China’s manufacturing sector would remain strong. And from 2009-2011, when the USD was suffering, that’s exactly what happened, perfectly working in China’s favour. However, with the historic two-year rally of the USD, China’s economy has lagged with a pegged yuan, particularly its manufacturing sector.
Due to a slowing global economy and strong yuan, which rose in value nearly 50% in the last decade against key Chinese trading partners’ currencies, manufacturing in China, for its standards, has collapsed.In July, exports in China dropped by a whopping 8% year over year. Commercial debt is skyrocketing. Forbes columnist
Kenneth Rapoza reported that China’s total debt load is now over 280% of GDP. What’s more, China is losing out on manufacturing within its own region. The South Korean won, Malaysian ringgit and Vietnamese dong have lost significant value against the yuan in recent years.
Rapoza from Forbes reported that Vietnam is now the lowest cost producer in the region. This is devastating for China’s growth outlook, particularly when one considers that the government must maintain 7% GDP to avoid civil unrest. With 1.4 billion people, China has to create 13 million new jobs every year in order to maintain social stability, according to Rick Niu, CEO of Starr Strategic Partners. The entire Chinese economy was built on low-cost manufacturing jobs.
Adding to China’s concern is the threat of a Fed rate hike in September and a collapsing stock market. Rumours began swirling in June that its government was contemplating a bold monetary move. However, despite all these factors, China was reluctant to devalue the yuan at that time. It had a lot riding on maintaining stability in its currency… but when the Chinese government discovered just two weeks ago that the US had been playing them for years, it decided to fight back…
IMF Announcement: a blow to China’s Yuan
On August 4th the IMF (controlled by Washington) reportedly recommended delaying the yuan’s acceptance into a global currency basket known as the Special Drawing Right (SDR). This was a devastating blow for the Chinese government, yet it went largely ignored by the mainstream financial media.
China has been vigorously working on gaining acceptance into the IMF’s currency basket since 2009, and has had to jump through hoops at the request of the US just for the yuan to be considered.
Not only does acceptance into the SDR guarantee credibility for a currency, it also increases global liquidity. Increasing the yuan in global trade has been a top priority for China for more than a decade. And it’s no secret that China wants the yuan to be the world reserve currency.
So for many years China pandered to US demands, against the best interest of its manufacturing sector, to let the yuan appreciate in order to gain acceptance into the SDR basket. Barrons reported that,
“Inclusion would prompt central banks to hold more yuan in their reserves, which they would invest in yuan-denominated bonds. That would help China realize its goal of reducing the dollar’s global dominance, and lure foreign capital into China’s bond market as it tries to dig its way out from under a debt bubble at least twice the size of its GDP.”
Bending to America’s requests appears to have been in vain, however. According to Reuters, Germany, Britain, France and Italy support accepting the yuan into the SDR basket. But the US, along with Japan, will not allow it…
Only dollars, euros, pounds and yen are included in this ‘elite’ group of currencies (SDR basket). Without acceptance of the yuan, China’s path to controlling the world’s reserve currency will be nothing more than a pipe dream; and its debt burden, mentioned earlier, won’t be exported globally as the US, Britain, Europe and Japan have been able to do with theirs.
Just a week after this reported rejection of the yuan in the SDR basket was leaked, China decided to devalue its currency…
There is no such thing as a coincidence, according to the CIA’s motto. China devalued the yuan in retaliation and wants to put the Fed, and America, back on their heels.
Fed’s Dollar tested by China’s Yuan in Currency War
Can the Fed raise rates in September now that China has devalued its currency? Anything is possible, but the consequence will be significantly negative for the US.
There have been almost 100 rate cuts globally this year alone. A rate hike by the Fed, even a mere 0.25%, would make the USD an outlier and drive in a ton of liquidity to the dollar, which would further exacerbate its rally. And with a devalued yuan, potentially on its way to becoming fully de-pegged, Chinese goods will be even cheaper for America, which already suffers from an historic trade deficit with China. Furthermore, a rate hike would increase Corporate America’s growing problem of a strong dollar, which has been blamed for S&P companies’ 1.1% decline in earnings from a year ago.
But if the Fed doesn’t raise rates in September its credibility will be questioned…
From my vantage point, China’s yuan devaluation is the biggest monetary policy change in the world since the Fed announced the first QE. This move by the Chinese, much like QE, will impact other countries’ monetary policy for months to come. Vietnam, for example, has already responded by devaluing its currency in a bid to keep manufacturing jobs from China.
David Malpass of The Wall Street Journal reported, “China’s move is another step in the gradual shift away from the dollar bloc and U.S. economic leadership that dominated Asia since World War II. China hopes to replace this with an anchor to the yuan, and China-based institutions like the AIIB.”
Iran, China and the USD All Tied Together
The Obama Administration’s deal with Iran was highly controversial, to say the least. It has put a wider gap between the US and its key Middle East ally, Israel. And even some key Democrats oppose it, publicly embarrassing Obama. So why did Obama do it?
For the sake of preserving the US dollar as the world’s reserve currency.
Just like the TPP, an historic trade deal that blocks out China (click here to read my report from June on it), the Iran deal was made to curtail the rise of the yuan.
You see, China is Iran’s largest trading partner. While the sanctions were in place with Western nations and Iran over the last couple years, China was inking deals and buying oil (roughly 440,000 barrels per day) and other goods from the outcast nation. Going from China to Iran was military equipment, ranging from arms to fighter jets. And with the sanctions in place, these transactions weren’t being conducted in USD. They were being conducted in the yuan and other currencies.
This was an unintended consequence of the sanctions. And as China became Iran’s most important buyer, thanks to the sanctions, the use of the yuan grew. Even Russia, which started buying cheap oil from the Iranians, was using the yuan in transactions with the rogue nation.
As pressure began to mount from America’s allies to remove the sanctions on Iran (pressure rumoured to come from Germany, Italy, UK, and France), the US was left at a fork in the road. Either remove the sanctions and pretend it was because of a great deal made, or stick to their guns and risk key allies abandoning sanctions and increasing trade in the yuan and other currencies for Iranian crude…
Remember, Germany, Italy, and the UK were reported to support yuan inclusion into the coveted SDR basket mentioned earlier. They already supported the idea of increasing trade in the yuan.
John Kerry practically admitted it in an off the cuff statement made on the very same day China devalued its currency.
Reported by Real Clear Politics on August 11th:
Speaking with Reuters on Tuesday, Secretary of State John Kerry said that if Congress rejects the Iran nuclear deal, “that is a recipe, very quickly, my friends, businesspeople here, for the American dollar to cease to be the reserve currency of the world, which is already bubbling out there.”
It is unprecedented for the Secretary of State to throw a statement like that out to the public. But frankly, it was probably as honest as a politician can be.
The dollar, as the world reserve currency of the future, is in jeopardy. We’ve recently witnessed America negotiate with what it once called a rogue state, who very likely is going to be able to build a nuclear bomb now, for the sake of trying to save the dollar as the world reserve currency. How’s that for desperate?
That should show just how fearful America, and the Fed, have become. They are extremely worried about China and the rise of its yuan.
This marks the final stage of the global currency war. Markets and commodities are crashing. Desperate times lead to desperate measures. So be prepared for the unexpected, even a new military conflict involving the US.
All the best with your investments,
Aaron
PINNACLEDIGEST.COM
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This article represents solely the opinions of Aaron Hoddinott. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. THIS IS NOT INVESTMENT ADVICE. All statements in this report are to be checked and verified by the reader. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.
