Venezuelans Abandon Bolivar - Merchants Insist On Being Paid In Dollars

Venezuelans are struggling to carry out basic transactions like purchasing food as the value of their currency, the bolivar, has plunged against the dollar amid the country’s worsening economic collapse.

According to Reuters, over the past year, Venezuela’s currency weakened 97.5% against the greenback: Put another way, $1,000 of local currency purchased in early January would be worth just $25 now. The annual inflation rate in 2017 could reach $2,000. Though at least one other estimate puts the real rate of inflation closer to 2,800%.

Of course, President Maduro has blamed websites like DolarToday – which publishes the closest thing to an official black-market rate by surveying clandestine exchanges in Caracas and other cities – for the spread of black-market activity, part of a conspiracy organized by Washington and his local political opponents to force him from power.

One of the unintended consequences of the bolivar’s collapse has been a social experiment of sorts in the use of digital currencies: As we noted back in October, as many as 100,000 people are now mining digital currencies in Venezuela, defying a government crackdown that’s seen many of them thrown in prison.

But for those who can’t or haven’t resorted to transacting in bitcoin, an increasingly scarce supply of dollars is creating intractable problems for millions of Venezuelans, Reuters reported.

For many, simple purchases like a new tire for their car are simply out of reach.

There was no way Jose Ramon Garcia, a food transporter in Venezuela, could afford new tires for his van at $350 each.

 

Whether he opted to pay in U.S. currency or in the devalued local bolivar currency at the equivalent black market price, Garcia would have had to save up for years.

 

Though used to expensive repairs, this one was too much and put him out of business. "Repairs cost an arm and a leg in Venezuela," said the now-unemployed 42-year-old Garcia, who has a wife and two children to support in the southern city of Guayana.

 

"There’s no point keeping bolivars."

A practice that was initially adopted by shops catering to wealthy and middle-class Venezuelans is spreading to merchants selling everything from foodstuffs to medicine. Food sellers, dental and medical clinics, and others are starting to charge in dollars or their black-market equivalent - putting many basic goods and services out of reach for a growing number of Venezuelans.

"I can’t think in bolivars anymore, because you have to give a different price every hour,” said Yoselin Aguirre, 27, who makes and sells jewelry in the Paraguana peninsula and has recently pegged prices to the dollar. “To survive, you have to dollarize."

 

The socialist government of the late president Hugo Chavez in 2003 brought in the strict controls in order to curb capital flight, as the wealthy sought to move money out of Venezuela after a coup attempt and major oil strike the previous year.

 

Oil revenue was initially able to bolster artificial exchange rates, though the black market grew and now is becoming unmanageable for the government.

Still, President Nicolas Maduro has maintained his predecessor, the late Hugo Chavez’s policies on capital controls, even as the spread between the official rate - some 10 bolivars per dollar - and the black market rate - of around 110,000 per dollar - is now huge.

The trend is angering Venezuelans who don’t have access to dollars. As Reuters pointed out, it also dampened Christmas celebrations this year due to a shortage of pine trees, toys, meat, chicken, cornmeal…the list goes on.

While sellers see a shift to hard currency as necessary, buyers sometimes blame them for speculating.

 

Rafael Vetencourt, 55, a steel worker in Ciudad Guayana, needed a prostate operation priced at $250.

 

“We don’t earn in dollars. It’s abusive to charge in dollars!” said Vetencourt, who had to decimate his savings to pay for the surgery.

Most Venezuelans, earning just $5 a month at the black-market rate, are nowhere near being able to save hard currency.

"How do I do it? I earn in bolivars and have no way to buy foreign currency," said Cristina Centeno, a 31-year-old teacher who, like many, was seeking remote work online before Christmas in order to bring in some hard currency.

While many have begun mining bitcoin, purchasing the digital currency is also out of reach for many, since they would need to first convert their bolivars into dollars.

As the bolivar has continued to plummet, some communities have begun experimenting with alternative currencies that derive their value from a limited supply. In one Caracas neighborhood, several shops have started accepting the panal, one such alternative currency.

With the supply of dollars drying up since Maduro announced that the state-owned oil company would no longer settle payments for oil exports in greenbacks, it’s likely only a matter of time before more of these alternative paper currencies start springing up.

That is, unless the price of oil – which broke above $60 today – makes a surprising and altogether unlikely comeback.

 

Russia & China Use Logic When it Comes to Gold

Posted with permission and written by Rory Hall, The Daily Coin

 

 

 

As we reported both here and here, gold is the answer going forward. How we the people will access physical gold or if we will be able to access physical gold is really the only remaining question. How high gold is going is the other important question. I hope it doesn’t get into the lofty heights that have been suggested in recent years - highs like $7,000, $9,000 and even $10,000 an ounce, as it would be much harder for people to use in everyday transactions. Unless, of course, it was on the blockchain or some other yet-to-be-developed type of fintech.

 

It is also no secret that Russia is looking for the exit door where the Federal Reserve Note (FRN), world reserve currency, US dollar is concerned. Russia has made it very clear they are making all the moves to stop using the FRN/US dollar as their primary currency to settle international trade. Gold will probably handle Russia’s trade settlement just fine.

 

Gold Is Russian Answer To U.S. Dollar Dominance – CPM Group

Russia’s increased purchases of gold is not a red flag, but a clear message of diversification away from the U.S. dollar and its “monetary hegemony,” according to Jeff Christian, the CPM Group managing director.

In October, Russia added another 21 metric tons of gold, which tripled the amount over the last decade and brought the overall total to 1,800 tons.

Russia has added, approximately 18 tons per month, every month, for the past 3 years. At their current pace Russia will move ahead of China into sixth largest gold hoard by late Q1 2018.

 

But, it’s “business as usual for Russia,” Christian told Kitco News at the Silver & Gold Summit in San Francisco. “[Russia is] finally able to execute on a long-term desire to rebuild their [gold] inventories and to diversify away from the dollar.”

Russia has witnessed most of its gold reserves sold off after the breakup of the Soviet Union, which it has been attempting to regain since about 1997, Christian pointed out.

“In 1997 to 2005 [Russia] didn’t have the foreign exchange and capital inflows needed to convert money to gold. But, as the oil, palladium, and nickel prices started rising in 2005, all of a sudden, Russia’s economy had a massive inflow of U.S. dollars.”

But, the Russian government quickly realized that it had a problem relying on the U.S. currency, said Christian.

“Russia had a massive inflow of U.S. dollars at a time when the U.S. government was increasingly hostile toward the Russian government,” he noted, adding that Russia decided to diversify away from the American currency.

Christian added that Russia is not alone in sending this kind of message of diversification, highlighting that China as well as many other countries are on the same page.

“China in Q1 2009 bought a lot of gold that was supposed to go to China Investment Corp, the sovereign wealth fund. And instead, the government decided to add it to monetary reserves to send a message to the U.S. Treasury that China can in fact diversify monetary reserves,” he said.

Change is in the air, according to Christian: “There is a great dissatisfaction with the monetary hegemony that the U.S. has exercised since WWII and [the world] will move towards some sort of post-Bretton Wood floating exchange rate program at some point in the future.”

You know there is a serious alliance between Russia and China when even Jeffrey Christian can’t discuss one without mentioning the other. These two countries are working hand-in-glove to displace the FRN from its world reserve currency status and move into a system that includes gold at the foundation. Neither country wishes to upset the warmongers in Washington DC as these two countries understand they are dealing with an unstable group who haven’t honored one treaty they have ever signed – not one treaty in all the history of Washington DC has ever been honored. Russia and China are just going about their business of conducting business and when all the major competent pieces are in place it will be too late for the US/Uk to retaliate.

 

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

 

Russia & China Use Logic When it Comes to Gold

Posted with permission and written by Rory Hall, The Daily Coin

 

 

Check out these other articles by our contributors:

Dave Kranzler -  Bitcoin’s Inconvenient Truths: The Silence Is Deafening

Craig Hemke - Banks Again Defending Silver"s 200-Day Moving Average

Ask The Expert: Jim Willie

Rickards Warns "Prepare For A Chinese Maxi-Devaluation"

Authored by James Rickards via The Daily Reckoning,

China is a relatively open economy; therefore it is subject to the impossible trinity.

China has also been attempting to do the impossible in recent years with predictable results.

Beginning in 2008 China pegged its exchange rate to the U.S. dollar. China also had an open capital account to allow the free exchange of yuan for dollars, and China preferred an independent monetary policy.

The problem is that the Impossible Trinity says you can’t have all three. This model has been validated several times since 2008 as China has stumbled through a series of currency and monetary reversals.

For example, China’s attempted the impossible beginning in 2008 with a peg to the dollar around 6.80. This ended abruptly in June 2010 when China broke the currency peg and allowed it to rise from 6.82 to 6.05 by January 2014 — a 10% appreciation.

This exchange rate revaluation was partly in response to bitter complaints by U.S. Treasury Secretary Geithner about China’s “currency manipulation” through an artificially low peg to the dollar in the 2008 – 2010 period.

After 2013, China reversed course and pursued a steady devaluation of the yuan from 6.05 in January 2014 to 6.95 by December 2016. At the end of 2016, the Chinese yuan was back where it was when the U.S. was screaming “currency manipulation.”

Only now there was a new figure to point the finger at China. The new American critic was no longer the quiet Tim Geithner, but the bombastic Donald Trump.

Trump had threatened to label China a currency manipulator throughout his campaign from June 2015 to Election Day on November 8, 2016. Once Trump was elected, China engaged in a policy of currency war appeasement.

China actually propped up its currency with a soft peg. The trading range was especially tight in the first half of 2017, right around 6.85.

In contrast to the 2008 – 2010 peg, China avoided the impossible trinity this time by partially closing the capital account and by raising rates alongside the Fed, thereby abandoning its independent monetary policy.

This was also in contrast to China’s behavior when it first faced the failure of its efforts to beat impossible trinity. In 2015, China dodged the impossible trinity not by closing the capital account, but by breaking the currency peg.

In August 2015, China engineered a sudden shock devaluation of the yuan. The dollar gained 3% against the yuan in two days as China devalued.

The results were disastrous.

U.S. stocks fell 11% in a few weeks. There was a real threat of global financial contagion and a full-blown liquidity crisis. A crisis was averted by Fed jawboning, and a decision to put off the “liftoff” in U.S. interest rates from September 2015 to the following December.

China conducted another devaluation from November to December 2015. This time China did not execute a sneak attack, but did the devaluation in baby steps. This was stealth devaluation.

The results were just as disastrous as the prior August. U.S. stocks fell 11% from January 1, 2016 to February 10. 2016. Again, a greater crisis was averted only by a Fed decision to delay planned U.S. interest rate hikes in March and June 2016.

The impact these two prior devaluations had on the exchange rate is shown in the chart below.

Major moves in the dollar/yuan cross exchange rate (USD/CNY) have had powerful impacts on global markets. The August 2015 surprise yuan devaluation sent U.S. stocks reeling. Another slower devaluation did the same in early 2016. A stronger yuan in 2017 coincided with the Trump stock rally. A new devaluation is now underway and U.S. stocks may suffer again.

By mid-2017, the Trump administration was once again complaining about Chinese currency manipulation.

This was partly in response to China’s failure to assist the United States in dealing with North Korea’s nuclear weapons development and missile testing programs.

For its part, China did not want a trade or currency war with the U.S. in advance of the National Congress of the Communist Party of China, which begins on October 18.

President Xi Jinping was playing a delicate internal political game and did not want to rock the boat in international relations. China appeased the U.S. again by allowing the exchange rate to climb from 6.90 to 6.45 in the summer of 2017.

China escaped the impossible trinity in 2015 by devaluing their currency.

China escaped the impossible trinity again in 2017 using a hat trick of partially closing the capital account, raising interest rates, and allowing the yuan to appreciate against the dollar thereby breaking the exchange rate peg.

The problem for China is that these solutions are all non-sustainable.

China cannot keep the capital account closed without damaging badly needed capital inflows. Who will invest in China if you can’t get your money out?

China also cannot maintain high interest rates because the interest costs will bankrupt insolvent state owned enterprises and lead to an increase in unemployment, which is socially destabilizing.

China cannot maintain a strong yuan because that damages exports, hurts export-related jobs, and causes deflation to be imported through lower import prices. An artificially inflated currency also drains the foreign exchange reserves needed to maintain the peg.

Since the impossible trinity really is impossible in the long-run, and since China’s current solutions are non-sustainable, what can China do to solve its policy trilemma?

The most obvious course, and the one likely to be implemented, is a maxi-devaluation of the yuan to around the 7.95 level or lower.

This would stop capital outflows because those outflows are driven by devaluation fears. Once the devaluation happens, there is no longer any urgency about getting money out of China. In fact, new money should start to flow in to take advantage of much lower local currency prices.

There are early signs that this policy of devaluation is already being put into place. The yuan has dropped sharply in the past month from 6.45 to 6.62. This resembles the stealth devaluation of late 2015, but is somewhat more aggressive.

The geopolitical situation is also ripe for a Chinese devaluation policy. Once the National Party Congress is over in late October, President Xi will have secured his political ambitions and will no longer find it necessary to avoid rocking the boat.

China’s President Xi Jinping awaits appointment to a second term at the 19th National Congress of the Communist Party of China, starting October 18. His reappointment is a foregone conclusion.

China has clearly failed to have much impact on North Korea’s nuclear weapons ambitions. As war between North Korea and the U.S. draws closer, neither China nor the U.S. will have as much incentive to cooperate with each other on bilateral trade and currency issues.

Both Trump and Xi are readying a “gloves off” approach to a trade war and renewed currency war. A maxi-devaluation of the yuan is Xi’s most potent weapon.

Finally, China’s internal contradictions are catching up with it. China has to confront an insolvent banking system, a real estate bubble, and a $1 trillion wealth management product Ponzi scheme that is starting to fall apart.

A much weaker yuan would give China some policy space in terms of using its reserves to paper over some of these problems.

Less dramatic devaluations of the yuan led to U.S. stock market crashes. What does a new maxi-devaluation portend for U.S. stocks?

We might have an answer soon enough.

Offshore Yuan Tumbles To 2-Week Lows, Biggest Drop Since Election

Offshore yuan has now dropped almost 16 handles in the last 8 days since Chinese officials voiced their concerns "about a rallying yuan as exporters come under strain."

Tonight"s tumble pushes the Yuan to its lowest since August for the biggest 8-day drop since the election...

And offers Trump some excuses to be mad at China for "devaluing" their currency after the dollar dumped for most of the year...

Notably, while Yuan is tumbling, Hong Kong Dollar spiked back toewards the peg...

America's Weapons: "The Dollar And The Drone"

Authored by Brian Maher via DailyReckoning.com,

It was said that “the guinea and the gallows” were the true instruments of British imperial power.

The guinea represented the coined wealth of Great Britain.

The gallows represented its… constabulary zeal in policing restless natives.

This is the 21st century of course… a time of enlightenment.

Today’s instruments of imperial power are no longer the guinea and the gallows.

No. Today’s instruments of imperial power are “the dollar and the drone.”

The dollar and the drone are America’s weapons.

Like the 19th-century pound (which replaced the guinea), today’s dollar is the world’s reserve currency.

Like the 19th-century pound, the dollar finances some two-thirds of global trade.

And the gallows?

Britain hanged its foreign trouble. America explodes its own in drone attacks.

Here is civilization; here is progress.

The sun eventually sank on the British Empire… the gallows came down… and the pound lost its global reserve status.

The U.S. will have its drones. But is its other weapon, the dollar, close to losing global reserve status?

Recent developments may tell…

The global oil trade has centered on the dollar since 1974, when Saudi Arabia agreed to enthrone the dollar as currency of the oil market.

If it was oil you wanted… it was dollars you needed.

But now China — world’s top oil importer — is preparing to create an oil market that bypasses the dollar entirely.

The plan would let China buy oil from Russia and Iran with its own currency, the yuan.

But the yuan is not a major reserve currency like the dollar.

Under this plan, Russia and Iran would be able to swap yuan for an asset far more desirable than Chinese scraps of paper — gold itself.

Perhaps that explains why China’s been hoarding so much gold in recent years?

Jim Rickards says this system marks the beginning of the end for the petrodollar:

China, Russia and Iran are coordinating a new international monetary order that does not involve U.S. dollars. It has several parts, which together spell dollar doom. The first part is that China will buy oil from Russia and Iran in exchange for yuan.

 

The yuan is not a major reserve currency, so it’s not an especially attractive asset for Russia or Iran to hold. China solves that problem by offering to convert yuan into gold on a spot basis on the Shanghai Gold Exchange…

 

This marks the beginning of the end of the petrodollar system that Henry Kissinger worked out with Saudi Arabia in 1974, after Nixon abandoned gold.

But it’s not only China, Russia and Iran that are out to dethrone King Dollar.

They’re joined by the rest of the “BRICS” nations — Brazil, India, South Africa.

Together they represent 25% of global economic output.

At last week’s annual BRICS summit in China, members announced full-throated support for China’s plan.

The message, clear as gin: The dollar’s days of “exorbitant privilege” must end.

And yesterday brought news that could further accelerate China’s de-dollarization plans…

Treasury Secretary Steve Mnuchin announced the U.S. would consider locking China out of the international dollar system if Beijing doesn’t cooperate with new sanctions against North Korea:

If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system. And that’s quite meaningful.

“Meaningful” might be one word for it. “Menacing” would be another.

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a network that facilitates trillions of dollars in international money transfers each year.

It is the oil that lubricates the machinery of the international financial system — or as Jim Rickards styles it, “the oxygen supply that keeps the global financial system alive.”

And to cut off China’s oxygen?

“That is why China buys gold,” Jim Rickards tweeted this morning from London.

Our colleague Dave Gonigam of The 5 Min. Forecast half-jestingly wonders, “Is the Trump administration trying to kill off the U.S. dollar’s status as the globe’s reserve currency?”

Of course, the dollar will not lose reserve status tomorrow, next week, next year.

But the direction of travel seems clear enough.

Jim:

In 2000, dollar assets were about 70% of global reserves. Today, the comparable figure is about 62%. If this trend continues, one could easily see the dollar fall below 50% in the not-too-distant future.

How does one go bankrupt?

Slowly at first, said Hemingway — then all at once.

That’s how the dollar will likely lose its reserve status… slowly at first… then all at once…

De-Dollarization Spikes - Venezuela Stops Accepting Dollars For Oil Payments

Did the doomsday clock on the petrodollar (and implicitly US hegemony) just tick one more minute closer to midnight?

Source: The Burning Platform

Apparently confirming what President Maduro had warned following the recent US sanctions, The Wall Street Journal reports that Venezuela has officially stopped accepting US Dollars as payment for its crude oil exports.

As we previously noted, Venezuelan President Nicolas Maduro said last Thursday that Venezuela will be looking to “free” itself from the U.S. dollar next week. According to Reuters,

“Venezuela is going to implement a new system of international payments and will create a basket of currencies to free us from the dollar,” Maduro said in a multi-hour address to a new legislative “superbody.” He reportedly did not provide details of this new proposal.

Maduro hinted further that the South American country would look to using the yuan instead, among other currencies.

“If they pursue us with the dollar, we’ll use the Russian ruble, the yuan, yen, the Indian rupee, the euro,” Maduro also said.

*  *  *

And today, as The Wall Street Journal reports, in an effort to circumvent U.S. sanctions, Venezuela is telling oil traders that it will no longer receive or send payments in dollars, people familiar with the new policy said.

Oil traders who export Venezuelan crude or import oil products into the country have begun converting their invoices to euros.

The state oil company Petróleos de Venezuela SA, known as PdVSA, has told its private joint venture partners to open accounts in euros and to convert existing cash holdings into Europe’s main currency, said one project partner.

The new payment policy hasn’t been publicly announced, but Vice President Tareck El Aissami, who has been blacklisted by the U.S., said Friday, "To fight against the economic blockade there will be a basket of currencies to liberate us from the dollar."

There is no major market reaction for now - a modest bid to Bitcoin and some weakness in EUR and Gold (seems someone wants this to look like nothing).

However, as Nomura debt analyst Siobhan Morden warns:

“You can say whatever you want for your domestic propaganda and make it look like you’re retaliating against the U.S.... This political posturing will only be to their detriment.”

So what happens if Europe also sanctions Venezuela? Will Rubles or Yuan... or Gold be the only way to buy Venezuela"s oil?

*  *  *

This decision by the nation with the world"s largest proven oil reserves comes just days after China and Russia unveiled the latest Oil/Yuan/Gold triad at the latest BRICS conference.

It’s when President Putin starts talking that the BRICS reveal their true bombshell. Geopolitically and geo-economically, Putin’s emphasis is on a “fair multipolar world”, and “against protectionism and new barriers in global trade.” The message is straight to the point.

“Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.”

“To overcome the excessive domination of the limited number of reserve currencies” is the politest way of stating what the BRICS have been discussing for years now; how to bypass the US dollar, as well as the petrodollar.

Beijing is ready to step up the game. Soon China will launch a crude oil futures contract priced in yuan and convertible into gold.

This means that Russia – as well as Iran, the other key node of Eurasia integration – may bypass US sanctions by trading energy in their own currencies, or in yuan.

Inbuilt in the move is a true Chinese win-win; the yuan will be fully convertible into gold on both the Shanghai and Hong Kong exchanges.

The new triad of oil, yuan and gold is actually a win-win-win. No problem at all if energy providers prefer to be paid in physical gold instead of yuan. The key message is the US dollar being bypassed.

RC – via the Russian Central Bank and the People’s Bank of China – have been developing ruble-yuan swaps for quite a while now.

Once that moves beyond the BRICS to aspiring “BRICS Plus” members and then all across the Global South, Washington’s reaction is bound to be nuclear (hopefully, not literally).

Washington’s strategic doctrine rules RC should not be allowed by any means to be preponderant along the Eurasian landmass. Yet what the BRICS have in store geo-economically does not concern only Eurasia – but the whole Global South.

Sections of the War Party in Washington bent on instrumentalizing  India against China – or against RC – may be in for a rude awakening. As much as the BRICS may be currently facing varied waves of economic turmoil, the daring long-term road map, way beyond the Xiamen Declaration, is very much in place.

*  *  *

Having threatened China today with exclusion from SWIFT, we suspect Washington is rapidly running out of any great ally to sustain the petrodollar-driven hegemony (and implicitly its war machine). Cue the calls for a Venezuelan invasion in 3...2..1...!

Lagarde Hints At IMF Being Based In China In Future

In a comment sure to stir up questions over dollar hegemony (and new world order conspiracy thoughts), IMF Managing Director Christine Lagarde admitted during an event today in Washington that The International Monetary Fund could be based in Beijing in a decade.

As Reuters reports, Lagarde said that such a move was "a possibility" because the Fund will need to increase the representation of major emerging markets as their economies grow larger and more influential.

"Which might very well mean, that if we have this conversation in 10 years" time...we might not be sitting in Washington, D.C. We"ll do it in our Beijing head office," Lagarde said.

Lagarde"s comments build on questions raised in May on The IMF"s push for World Money... Yi Gang, the Deputy Governor of the People’s Bank of China disclosed to the IMF panel that,

“China has started reporting our foreign official reserves, balance of payment reports, and the international investment position reports.”

“All of these reports, now, in China are published in U.S dollars, SDR and Renminbi rates… I think that has the advantage of reducing the negative impact of negative liquidity on your assets.”

What that means in real terms is that China views the opportunity of being a part of the exclusive world money club as an opportunity to diversify away from the U.S dollar.

The Bank of China official took that message even further saying that he hopes that China could lead in world money operations by integrating it into the private sector.

“If more and more people, companies and the market use SDR as unit of accounts – that would generate more activity in the market with focus on the MSDR. [The hope would be] that they could create more products and market infrastructures that would be available for trade products to be denominated in SDR.”

The People’s Bank of China official referenced how this trend was already underway. Just last year Standard Chartered bank began to maintain accounts in SDR’s. “In terms of the first and secondary markets they will develop fairly well.”

Perhaps the most important segment that the Chinese official signaled was his reference that, “The Official Reserve SDR (OSDR) that allocation from the IMF is very important. [This allows] Central Banks to make the SDR an official asset, and easier for them to convert that asset into the reserve currency they need.”

What that means is that China will become an even greater player in the world money market.

Nomi Prins, an economist and historian stated when analyzing China’s economic positioning, “The expanding SDR basket is as much a political power play as it is about increasing the number of reserve currencies for central banks for financial purposes.”

*  *  *

As a reminder, the IMF"s bylaws call for the institution"s head office to be located in the largest member economy and since the IMF was launched in 1945, that has always been the United States, which currently has an effective veto over IMF decisions with a 16.5 percent share of its board votes.

But, as Reuters notes, economists estimate that China, with growth rates forecast above 6 percent, will likely overtake U.S. gross domestic product sometime over the next decade to become the world"s largest economy in nominal terms.

Some, including the IMF, have argued that China already contributes more to global growth on a purchasing power parity basis, which adjusts for differences in prices.

The IMF last revised its quota system, or voting structure in 2010, but is set to launch another review next year.

Nothing lasts forever...

Is The Real Dollar Pain-Trade Lower?

Authored by Kevin Muir via The Macro Tourist blog,

Although I am sure they were some traders advocating shorting the US dollar into the Trump bump, they sure seemed few and far between (apart from this badass cat who nailed the trade and is now covering into the USD weakness).

In fact, when I think about the opinions from the “cool kids” over the past six months, I can only recall all-out-bulls, or unsure fence sitters. Name me a big-name US dollar bear pounding the table - none spring to mind.

And in the heyday period following Trump’s election, the US dollar bullishness was downright exuberant.

“Super dollar bull market” was a recurrent theme amongst the myriad of bulls who were convinced the US dollar was headed to the moon. Whether it was due to Trump’s supposed superb business acumen, or the acceleration of the emerging market USD debt obligation payback vicious circle, all these bulls had their own reasons why greenback would continue to appreciate.

Well, how did it turn out?

A complete dud. Trump’s inauguration proved to be the top, and it has been nothing but downhill since then. I am actually quite mad at myself, fading this consensus trade proved to be one of the greatest trades of 2017 (and yet another example of how in this day of limited alpha, the best trade is fading the crowd).

Yet the interesting part of this extended move? No one is getting excited about it.

I pulled up my composite speculative positioning of CME currency positions, and it is pretty well zero. US dollar specs are almost as flat as your uncle’s drunken campfire singing at a cottage long weekend.

Recently, two terrific, must-follow, twitter traders were discussing this situation. 13D Research, author of the terrific What I learned this week, first made a comment about the possibility of this US Dollar move continuing.

But then, Luke Gromen, who pens Forest for the Trees, chirped in with a comment I felt was especially apt.

Luke is right. No one is talking about this US dollar move continuing. I get the sense it’s actually the opposite. Most traders are still worried about the potential for the US dollar bull move to resume. If they are long any currencies, they have one finger on the sell button.

I get it. It’s tough to forget the pain from the relentless US dollar rally of the past 3 years.

When I was thinking about this situation, my mind wandered back to a MacroVoices interview with Tian Yang from Variant Perception. I had never heard Tian before, and I must say, I enjoyed his analytical approach immensely. But his comment about Morgan Stanley’s Stephen Jen’s smile theory really struck home. According to Jen, the US dollar does best when the US economy is really strong, or really weak. That immediately made intuitive sense. When the market is expecting US outperformance, the US dollar goes up because of higher rates and flows rushing into the US. During periods of economic stress, the reserve currency goes up as debt is paid down and US dollar credit is destroyed. But that has to leave a whole bunch of time when the US dollar goes down.

From 2014-2016 we were in the US outperformance period of the smile. That enthusiasm about US economic performance climaxed with Trump’s election and the fairy dust dreams about the new President’s economic prowess.

There were some pundits who believed we would switch from the positive part of the smile, to the other side, as the Fed hiked too fast, and caused a market disruption. But isn’t it more likely that this transition from one side of the smile to the other takes some time? Wouldn’t a period at the bottom of the smile be more probable?

And going back to Tian’s interview, here is a chart that shows the US dollar’s performance versus real rate differentials.

As you can see, the US dollar was way over its skis last year. And 13D’s forecast of a continued slump is by no means out of the realm of possibility to correct the difference between real rates and the US dollar.

(As an aside, if you want the full Variant Perception’s package from the interview, I uploaded it to my server and you can download it here. And while you are at it, make sure you head over the MacroVoices and help out Erik and Patrick by signing up to their weekly email. They produce this terrific show each week for free, and the size of their member list helps in attracting great guests. They won’t spam you, and not only that, it is chock full of great research pieces like the Variant Perception presentation.)

Today we have both the ECB and BoJ meeting. Could some renewed dovishness cause the US dollar to pick itself off the mat and rally a little? For sure. The US dollar is oversold and due for a bounce.

But a little part of me wonders if everyone is looking for a US dollar rally to sell into. I don’t yet know what I am going to do. I too, am looking for a better entry, but that makes me just another mope. Sometimes the best trades are the ones no one believes in, and which do not offer a clean, easy entry. Luke Gromen is right when he says there isn’t a soul alive who thinks the DXY could fall below 80. Don’t forget that markets often go to points least expected, and where they hurt the most participants. With the world massively overweight US financial assets, I almost wonder if the real US dollar pain trade is lower.

Yuan Funding Costs Spike As China Changes FX Rules

The effects of China"s rules-change proposals around the Yuan Fix are already starting to show in the FX, money markets as one-week funding costs have exploded to the annualized equivalent of 14%...

As a reminder, we reported late last week that China announced it would introduce a new "counter-cyclical factor" to reduce exchange-rate volatility while undermining efforts to increase the role of market forces. In some ways this announcement was not unexpected: recall that after a period of eerie stability, on Thursday the Yuan surged shortly after China"s downgrade by Moody"s, which prompted speculation that the central bank was directly manipulating the currency as the PBOC’s daily fixings had "materially diverged" from the prescribed formula, resulting in a gap between the reference rate and currency’s spot value.

Roughly at the same time as a similar move was taking place on Friday, Bloomberg first reported and China later confirmed that policy makers would add a “counter-cyclical factor” to the yuan’s daily fixing, a move which "would give authorities more control over the fixing and restrain the influence of market pricing." Subsequent detailed revealed that authorities would change the daily $/CNY fixing mechanism, so that the change of the fixing from the previous day’s close would also take into account a “counter-cyclical  adjustment factor” (how this is determined is not specified though), in addition to the USD’s movement against a basket of currencies.

While the practical consequence was a surge in both the onshore and offshore Yuan to three month highs, traders and commentators were left confused by this latest intervention by Beijing into what has become China"s fulcrum security.

“The counter-cyclical adjustment factor sounds like an increased role for the fixing to be nudged away from where markets would set it,” Sean Callow of Westpac Banking Corp told Bloomberg. “The authorities’ actions give the impression that they are more worried about yuan stability than declared in their public statements.”

The reaction has been notable...

Offshore Yuan has spiked dramatically in the last few days - coinciding with apparent Fed dovishness in the minutes and PBOC rule changes...

And, as Bloomberg details, deliverable yuan funding costs have soared after the PBOC said it’s considering changing the way it calculates the yuan daily reference rate. One-week forward points have more than doubled to the equivalent of about a 14 percent annualized interest rate.

Though traders anticipate that funding costs will retreat after month-end, a policy shift may keep markets on edge -- on two previous occasions the PBOC adjusted its fixing mechanism, in 2015 and earlier in 2017, costs remained elevated for weeks.

Trump's Currency War Hit List - Is Canada a Target?

A lot has been said about the potential for a US-Canada trade war. And judging from a lot of what’s happened, especially with respect to a strengthen USD, it looks like currencies may be what could light the spark to the barrel of gunpowder.

THE BACKDROP

The fact of the matter is that a strong dollar isn’t necessarily good for all sectors of the U.S economy. A strengthening dollar can have a “deleterious feedback loop” for export-oriented companies, since it means their products are now more expensive for foreign customers to buy. The net effect is that US-based manufacturers could suffer tremendously – including in terms of having to cut jobs and downsize their operations.

Another sour pill to swallow for Team Trump, if the USD continues to rise against major currencies, is the fact that foreign corporations, such as German pharmaceutical giant Bayer or Euro aerospace behemoth Airbus that do significant business in the U.S, profit more than U.S corporations selling overseas.   

And that’s exactly contrary to the platform of ‘Buy America”, job creation and boosting exports that Mr. Trump ran on during his campaign. So when a country’s currency weakens, in relation to the USD (i.e. the Greenback grows comparatively stronger), the war hawks in the Trump administration sit up and take notice!

WAR CLOUDS GATHER

Since November 2016, the PowerShares DB US Dollar Index (UUP), which tracks the USD against a basket of world currencies, has been on a steady increase, from $25.59 (Nov 11, 2016) to a high of $26.70 (Dec 20th, 2016). Granted that some of those gains have been paired back by Mr. Trumps jawboning statements ($25.89 at the time of writing); but it still represents a nearly 4.8% rise over a 6-month period ($24.71 on Aug 15, 2016).

Back on the campaign trail, Mr. Trump had already started beating the war drums. However, his war cries were largely directed towards China, and to his neighbour to the South – Mexico. But the battle cries keep getting louder. More recently, Trump senior trade advisors have levied similar accusations against Germany, and have also been severely critical about the Japanese currency “malpractices”. 

CANADA IN TRUMP’s CROSSHAIRS?

Things could get messy for Canada’s economy, if the same rhetoric is applied to the US dollar’s performance versus the Canadian dollar. Back in November, the USD traded at $1.34 per CAD, with “Trump Talk” pushing it up in strength to $1.36 (Dec 27, 2016). At the time of writing, the Greenback has lost some steam, trading at $1.31 per CAD – roughly just about where it traded 6 months ago.

So what will a stronger USD mean for the Canadian economy, if the Trump Administration decides to label Canada a “Currency manipulator”? What could a currency war with the US mean for Canada?

Well, the US is Canada’s largest trading partner, and any strengthening of the Greenback against the Loonie is positive for Canadian exporters, but negative for the US – since it tilts the balance of trade. Mr. Trump may therefore do all he can to ensure the dollar does not gain too much strength versus the CAD. One way to retaliate might be to target specific Canadian industries, like Energy, Forestry and Auto. 

In terms of specific impacts to Canadian economy, New Brunswick, Alberta and Ontario will be the worst three provinces to be hit by any currency war fallout; that’s according to TD Economics analysis. These three provinces have exports that are significantly exposed to the US, and any retaliatory measures by the US, such as a border tax, will have deleterious effect on provincial economies.

With respect to specific industries that could become casualties of any currency-initiated trade war between the two neighbours, based on TD Economics figures (Share of total goods exported to the US), it is likely that Auto Parts, Regulatory Consultants, Consumer goods and Forestry products will be the hardest hit.

SILVER LINING?

Searching for a sliver of sunlight peeking out of the dark currency war clouds, Trump advisors have assured Canada that, should trade and currency be up for discussions and renegotiations, then Canada may have nothing to be worried about from the new administration. However, as has been the hallmark of the new occupant at the Whitehouse, what’s said (or promised) and what’s actually delivered might be two entirely different things.

Brace for it…the USD-CAD currency wars might just be about to begin!

Trump And A New Gold-Backed Dollar

Submitted by Nick Giambruno via InternationalMan.com,

On August 15, 1971, President Nixon killed the last remnants of the gold standard.

Since then, the dollar has been a pure fiat currency, allowing the Fed to print as many dollars as it pleases.

Removing the US dollar’s last link to gold eliminated the main motivation for foreign countries to store large dollar reserves and to use the dollar for international trade.

At this point, demand for dollars was set to fall… along with the dollar’s purchasing power. So the US government concocted a new arrangement to give foreign countries another compelling reason to hold and use the dollar.

The new arrangement, called the petrodollar system, preserved the dollar’s special status as the world’s reserve currency.

In short, the US government made a series of agreements with Saudi Arabia between 1972 and 1974, which created the petrodollar.

The Saudis would use their dominant position in OPEC to ensure that all oil transactions would only happen in US dollars. And the US would guarantee the House of Saud’s survival.

It worked… for a while.

The petrodollar filled the void after the US severed the dollar’s last link to gold as the main prop to the dollar’s status as the world’ premier reserve currency.

So far, the petrodollar has lasted over 40 years. However, the glue is losing its stick.

I think we’re on the cusp of another paradigm shift in the international financial system, a change at least as fundamental as what happened in 1971 when Nixon severed the dollar’s last link to gold.

The relationship between Saudi Arabia and the US hit historic lows in 2016. I only expect it to get worse. Trump is the first president since the petrodollar system was enacted to be openly hostile toward the Saudis.

The death of the petrodollar system is my No. 1 black swan event for 2017.

It raises the question: What will fill the void when the petrodollar inevitably dies?

When that happens—and it may be imminent—something has to replace it. I think there are only two options.

Naturally, the global elite want to centralize more power into global institutions. In this case, that means the International Monetary Fund (IMF).

The IMF issues a type of international currency called the “Special Drawing Right,” or SDR.

The SDR is nothing new. The globalists have been slowly building it up since 1969. In the near future, it could be used as the premier international currency—the role the dollar has played since the end of World War 2.

The SDR is simply a basket of other fiat currencies. The US dollar makes up 42%, the euro 31%, the Chinese renminbi 11%, the Japanese yen 8%, and the British pound 8%.

It’s a fiat currency based on other fiat currencies… a floating abstraction based on other floating abstractions.

The SDR is not based on sound economics or the interests of the common man. It’s just another cockamamie invention of the economic witch doctors in academia and government.

The SDR is dangerous. It gives the government—in this case, a global government—more power. It’s a bridge to a powerful global monetary authority, and eventually a global currency.

Most decent people would consider this a bad thing. That’s why the global elite cloud their scheme with dull and opaque names like “Special Drawing Right.”

It’s an old trick. Governments have used it for eons.

The Federal Reserve is an excellent example. After two failed central banking experiments in the 1800s, anything associated with a central bank became deeply unpopular with the American public. So, central bank advocates tried a fresh branding strategy.

Rather than call their new central bank the Third Bank of the United States (the previous two were the First and Second Banks of the United States), they gave it a vague and boring name. They called it “the Federal Reserve” and managed to hide it in plain sight from the average person.

Nearly 100 years later, most Americans don’t have the slightest clue what the Federal Reserve is, what it does, or how it has eroded their standard of living.

I think the same dynamic is at work with the IMF’s “Special Drawing Right.”

The breakdown of the petrodollar is the perfect excuse for the globalists to usher in their SDR solution.

So that’s the first option. It’s the global elites’ preferred outcome. It would be a very bad thing for personal and economic freedom. It means more fiat currency, more centralization, and less freedom for the individual.

The second option is to simply return to gold as the premier international money. Here’s how it could happen…

Trump might play along with the globalists’ schemes, but I doubt it. He’s the first president who’s openly and sincerely hostile toward globalism. He’s denounced it repeatedly.

Trump recently said, “We will no longer surrender this country, or its people, to the false song of globalism.”

In my view, there’s only one way Trump could fight the global elites and their SDR plan: return the dollar to some sort of gold backing.

Trump has said favorable things about gold in the past. So have some of his advisers.

It wouldn’t be easy. He’d face one hell of a struggle with the globalists. And winning would be far from certain.

No matter what, the death of the petrodollar, just like the end of the dollar’s link to gold, will be very good for the dollar price of gold and gold mining stocks.

When Nixon took the dollar off gold in 1971, gold skyrocketed over 2,300%. It shot from $35 per ounce to a high of $850 in 1980. Gold mining stocks did even better.

Gold is still bouncing around its lows. Gold mining stocks are still very cheap. I expect returns to be at least as great as they were during that paradigm shift in the international monetary system.

All this is why what happens after Trump’s inauguration could change everything… in sudden, unexpected ways.

Yuan Is Crashing (Again)

The volatility in the Chinese currency has gone from the sublime to the ridiculous. After exploding 21 handles stronger in the biggest PBOC-engineered short-squeeze in history - erasing the entire post-election sell-off - offshore Yuan is now collapsing once again, down 350 pips tonight (and over 10 big figures from Thursday"s highs). While interbank rates have calmed down, the rush to exit the currency has not...

The last two days are the biggest drop in offshore Yuan since Aug 2015"s devaluation... as PBOC weakens its fix by the most sine June 2016.

Pushing historical volatility to its highest since the Aug 2015 devaluation...

For some context, this level of volatility is over 10 standard deviations away from the pre-Aug 2015 norms.

Notably the moves accelerate afterPBOC Advisor Fan Gang told Bloomberg TV...

• *PBOC WANTS TO SEE FX RESERVES REDUCE SMOOTHLY, GRADUALLY: FAN


• *CHINA POLICY MAKERS NOT LIKELY GO FURTHER ON OUTFLOW CURBS: FAN


• *YUAN OVERVALUED IN PAST 3-4 YEARS AGAINST DOLLAR: FAN


• *CHINA POLICY MAKERS NOT LIKELY TO DROP INTERVENTION: FAN


• *USE OF YUAN HAS INCREASED DESPITE RECENT DEPRECIATION: FAN


• *CHINA NEEDS LESS FX RESERVE AFTER YUAN"S INCLUSION IN SDR: FAN

Which was followed by the state-run Global Times newspaper says in an English-language editorial, saying that the Chinese people will demand its government to “take revenge” if Donald Trump reneges on the one-China policy after becoming U.S. President.