Highlights of the week of October 7, 2013

ECBEURO YUAN Currency SwapPBOC

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of October 7, 2013.

  • Janet Yellen nominated by Obama to head US Federal Reserve, on Wednesday, October 9, 2013.
  • On Thursday, October 10, China and ECB signed a US$ 57 billion currency swap deal.
  • On October 10, it was announced that China overtook the USA to become the largest oil importer, in September of this year

Janet Yellen nominated by Obama to head US Federal Reserve:
Last Wednesday, October 9, US President Barack Obama has officially nominated Federal Reserve vice-chair Janet Yellen to be the next head of the US central bank. 

Janet Yellen, vice Chair of the US Federal Reserve

Her nomination had been widely expected since former Treasury Secretary Larry Summers withdrew his candidature last month amid opposition from liberal Democrats.

The big question about Yellen’s policy as the FED Chairwoman is, whether she will continue what Wall Street and Washington like to call “easy money” policies. That means pushing the cruise control button on the US$85 billion-a-month stimulus program known as quantitative easing that was spearheaded by the current Fed chairman, Ben Bernanke.

The answer to this question is simple, Yellen will have to continue the FED’s easy money policies. She has no choice. The economy is getting no better, and a consensus is forming that stopping the stimulus could make things suddenly worse.

In 2010, Yellen said, that she could vote for negative interest rates, in other words, you would have a deposit with the bank of US$ 100,000 at the beginning of the year and at the end, you would only get US$ 95,000 back, that she would be voting for. That is what she would stand for. And basically her view is to keep interest rates in real terms, in other words, inflation-adjusted.

Due to this chances are that that “Janet Yellen” would make Bernanke look like a hawk.

China and ECB signed US$ 57 billion currency swap deal
On  Thursday, October 11, The People’s Bank of China and the European Central Bank signed a currency swap agreement worth 350 billion yuan or equivalent of US$ 57 billion.

Such agreements mean the central banks can exchange currencies and firms can settle trade in local currencies rather than in US dollars.

The deal is one of the largest for China as it looks to build a more international role for the yuan.

In recent years, China has grown in importance as a trade partner for Europe. Overall trade volumes between the euro zone and the world’s most populous nation stood at roughly a third of a trillion euros in 2011 and 2012, up from €306 billion in 2010, according to European statistics agency Eurostat.

For China, the ECB deal represents one of its most significant efforts to increase the use of the yuan, or renminbi, internationally.

It will last for three years and can be extended if both parties agree.

China’s currency, the yuan, is also referred to as renminbi.

As can be seen from below chart the Chinese yuan has appreciated steadily against the US-Dollar the last 5 years.

Chines Yuan versus US Dollar 5 year chart

Foreign exchange swaps such as these mean that two countries agree to swap, or borrow, each other’s currency at an agreed rate.

In doing so, the parties involved avoid swings in exchange rates. They can also be less reliant on the US dollar for bilateral trade and some business deals.

The new arrangement will provide more liquidity to the renminbi market in the euro area, promote overseas use of the yuan, and help facilitate trade and investment,” Xinhua reported China’s central bank as saying in a statement.

The European Central Bank said: “The swap arrangement has been established in the context of rapidly growing bilateral trade and investment between the euro area and China, as well as the need to ensure the stability of financial markets.”

Europe’s central bank also said the deal would reassure eurozone banks of the continuous provision of Chinese yuan and that banks in the Euro zone will henceforth have the security they need to develop their activities in renminbi over the long term,

China overtook the USA to become the largest oil importer, in September 2013
On  last Thursday, October 20, China achieved another world-beating status, by surpassing the USA from its top spot as the world’s biggest net importer of oil.

The country’s fast-growing economy, as well as the rise in car sales, has led to its new status according to September’s data of the Energy Information Administrator (EIA).

According to the agency. China’s oil consumption outstripped production by 6.3 million barrels a day,  versus 6.1 million in the USA.

In September, Americans used 18.6 million barrels per day of oil and other liquid fossil fuels, while China used 10.9 million, according to the EIA’s Short-Term Energy Outlook. U.S. production was 12.5 million barrels per day, while that of China was 4.6 million.

China’s economy, the world’s second-largest, is cooling but is still forecast to grow by nearly eight per cent this year, well above forecasts for the U.S.

Given the country’s huge population (1.354 billion people) and its rapid economic growth over the past 47 years, China’s consumption of crude oil and refined petroleum products has demonstrated a steadily rising trend. Expectations are the trend will continue.

Below Chart shows China’s Oil consumption from 1965 t0 2012.

China Oil Consumption

Overall, the United States still should be the biggest oil consumer next year at about 18.7 million barrels per day, down from its peak of 20.8 million in 2005, according to the EIA. It said China’s consumption next should be about 11 million barrels per day.

The belief is that as China’s economy, currently ranked second in the world, grows and eventually surpasses the United States as the world’s largest economy, its need for increased energy, and especially oil, will grow.

PGM Capital comments:
Up to now, China’s central bank has signed currency swap deals amounting to some 2.2 trillion yuan with 25 countries and regions, for which the ones closed with The United Kingdom (June 23rd, 2013),  Brazil (March 27th, 2013), Singapore (March 7th, 2013), Australia, (March 22nd, 2012) and United Arab Emirates (January 17th, 2012) are worth mentioning.

According to data collected in August by the Bank for International Settlements, the Chinese renminbi, or yuan, is now the eight most traded international currency as can be seen from below chart.

Ranking international Currencies

Trading in the Chinese currency more than tripled over the past three years to US$ 120 billion a day in 2013, the BIS said in a triennial report published in September. The yuan was previously 17th. The expansion’s been driven by offshore trading, with renminbi turnover soaring from US$ 34 billion a day in 2010 to US$ 120 billion in 2013.  Since January 2012, value of renminbi trades has increased by 113 percent according to data provider Swift.

By signing a currency swap agreement with the ECB, is a clear sign that China wants its currency, the yuan, to rival the US dollar as a reserve currency.

The fact that China has been able to sign bilateral agreement with 25 countries up to now, for which the one closed with the ECB on Thursday October 11th, can also be seen as a fact that most (exporting) countries are losing their faith in the US-Dollar as the reserve currency.

China’s gold buying spree of the last few years can be seen as an effort of the Chinese to consider backing the yuan with gold. Such a move by China was likely as China seeks to become a superpower and lessen and undermine U.S. political dominance. We have in the past discussed the possibility of the Chinese pegging their currency to gold bullion.

This decision, if taken, may lead to huge volatility in foreign exchange markets, a sky rocketing price of Gold and other precious metals, a depreciating dollar and ultimately the greatest shift of wealth ever seen on the planet.

Due to this we advise our readers, to be critical and for the meantime to avoid any form of cash-investments, in any currency, but specially the US-Dollar and to hold a great portion of their long-term savings in physical Gold and Silver, safely stored in a country with a history of protecting assets and investors right.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Gold, Silver and other precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely

Eric Panneflek

 

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