The Round

The term Yuan in Chinese means round, after the shape of the coins. The Yen is a cognate of the same term and is represented by the same character. On Christmas day, Prime Minister Noda unveiled a new pledge of cooperation between the Japanese and Chinese governments to support the Yuan. Transactions between the 2nd and 3rd largest economies of the world would be encouraged in their own fiat, commerce now generally conducted in dollars.

Tokyo also committed to supporting the growth of Yuan denominated bonds. Promoting market sales would also be buttressed with direct Japanese government purchases. On Monday, the Renminbi promptly opened at new highs to the greenback.  A roughly 4.5% appreciation for the first 10 months of the year stalled in Nov. and Dec. The PBOC moved to relax reserve requirements as domestic tightening had showed global deflationary force.

A combination of easier domestic policy and an appreciating currency could become a potent combination in 2012. As monetary policy has shifted back to ease in nations that embraced restriction in 2011 (the EZ foible most notable), currency firmness in the yuan (and in certain crosses the buck) would be a meaningful firewall to the rampant (and misplaced) commodity infatuation of the first half of 2011. The Christmas Day "agreements" could signal the beginning of more dominant currency blocs on the global stage.  Here at home, the US became a petroleum "product" exporter for the first time. Our powerful partners in Canada and Mexico were the primary importers.

One note of caution: The two nations joining to promote Yuan diversification are also the 2 largest purchasers and holders of US government debt. Last week, Asian selling was robust during the bond rout. As we have discussed before, the Fed's cache of Govvies is an important offset to these foreign holdings. The speed with which the Fed amassed the stockpile was impressive. However, Op Twist adjustments and even marginal negative changes to foreign rollovers could create messier Refundings - even under the blanket of permanent ZIRP. 2012 could be the year  "the Round" gets real.

Leave a Reply

Your email address will not be published. Required fields are marked *