The move away from the dollar

Japan and Australia are ignoring warnings from the US not to join China's new bank

China’s President Xi Jinping poses for photos with guests at the Asian Infrastructure Investment Bank launch ceremony at the Great Hall of the People in Beijing

Business Insider,

20 March, 2015

TOKYO/SYDNEY, (Reuters) – Japan signaled cautious approval of the China-led Asian Infrastructure Investment Bank (AIIB) on Friday and said for the first time that, if conditions were met, it could join the institution that the United States has warned against.

Australian Treasurer Joe Hockey said there was “a lot of merit” in the bank and the Sydney Morning Herald newspaper reported that Canberra could formally decide to sign up when the full cabinet meets on Monday.

Japan, Australia and the South Korea, all major U.S. allies, are the notable regional absentees from the AIIB. The United States, worried about China’s growing diplomatic clout, has questioned whether the AIIB will have sufficient standards of governance and environmental and social safeguards.

But after Britain broke ranks with Western nations and said earlier this month that it would join the AIIB, other major EU members have followed suit.
Australia now appears close to joining, although no formal decision has been made, and South Korea may be as well.

Japanese Finance Minister Taro Aso said Tokyo could consider joining the China-led bank if it could guarantee a credible mechanism for providing loans.
“We have been asking to ensure debt sustainability taking into account its impact on environment and society,” he told reporters after a cabinet meeting.

“We could (consider to participate) if these issues are guaranteed. There could be a chance that we would go inside and discuss. But so far we have not heard any responses.”

It was a surprising comment from Japan.

Although China and Japan, the world’s second- and third-largest economies, have deep trade and business relations, their diplomatic ties are tense over a territorial dispute and they compete for influence across Asia.

The AIIB could emerge as a rival to the Asian Development Bank (ADB), the Manila-based regional financial institution that Japan dominates along with the United States. By custom, the ADB is headed by a former senior official from the Bank of Japan or the country’s finance ministry.

BOJ Governor Haruhiko Kuroda, former ADB president and vice finance minister, responded cautiously when asked about the AIIB.

“There are huge needs, demands for infrastructure investment in Asia,” he said at a news conference on Friday.

“On the other hand, the World Bank and ADB have been helping developing countries in Asia to improve infrastructure for the last 50 years,” Kuroda said. “They have accumulated know-how and experience … That may be the most I can say.”

A general view of the signing ceremony of the Asian Infrastructure Investment Bank at the Great Hall of the People in Beijing October 24, 2014.

OUR NEIGHBOURHOOD

Australia’s Hockey said no final decision had been made on Australia’s involvement but the matter had been under careful consideration.

“More than 30 countries have already signed up. This is going to operate in our region, in our neighbourhood,” he told a radio station in Brisbane.

“There is a lot of merit in it, but we want to make sure there are proper governance procedures. That there’s transparency, that no one country is able to control the entity.”

The Sydney Morning Herald said Canberra could invest as much as A$3 billion ($US2.3 billion) in the bank and that the National Security Committee has cleared the way for the investment.

South Korean government officials denied a newspaper report that Seoul had decided to join in exchange for a five per cent stake in the AIIB and the position of deputy chief.

The finance ministry said in a statement South Korea will make a decision on whether to join the bank “through close consultation with major countries and after considering various factors such as economic advantages and disadvantages”.
Hockey said joining the AIIB would not affect Australia’s close relationship with the United States and also referred to the gains that Australian companies could reap

“The United States understands that this is a bank that’s going to be operating in our region. It’s going to be using contractors in our region. We want Australian contractors involved, we want work for Australians out of this bank,” he said.
“And because it’s operating in our region, in our neighbourhood, it is important that Australia fully understand and look at participating in this Bank.”

Iran backs notion of ruble/rial trade with Russia – ex-foreign minister

RT,

20 March, 2015

Tehran is open to the idea of conducting more trade payments in rubles and rials, not US dollars, and would support an official deal, according to Iran’s former Minister of Foreign Affairs Kamal Kharrazi.

"This is a very important step that Iran and Russia should take. And there is no other way to get rid of the dominance of the dollar in trade exchanges,” Kharrazi said Friday, RIA Novosti reported.

Kharrazi is now director of the Strategic Council for Foreign Relations, having served as Iran’s foreign minister from 1997 to 2005.

Iran “will very seriously consider the question” of using Russian and Iranian national currencies to settle bilateral trade, adding it was “natural for Iran to welcome such an agreement,” Kharrazi said.

Russia-Iran trade is currently worth $5 billion a year. A so-called ‘oil-for-goods’ contract has long been discussed, by which Moscow would buy oil from Tehran and export products and expertise in machinery, rail, trucks, metals and grain. 

The West worries that the deal will push Iran to exceed its 1 million barrels per day limit, which is part of its nuclear deal with Russia, China, the US, Britain, France, Germany and Iran.

READ MORE: Sanctioned Russia and Iran sign 5-yr deal to ease Western pressure

Iran, sanctioned by the US and Western nations since its Islamic Revolution in 1979, hasn’t been able to develop or export its oil and gas products. Sanctions were extended and justified over the fear that Iran was developing nuclear weapons. In 2012, the EU barred the country from using SWIFT transactions, essentially cutting it off from the global financial world.

Both the US and EU said they are ready to lift sanctions against Iran once a comprehensive nuclear agreement is reached, RIA Novosti quoted an Iranian delegate as saying on Friday.

Iran and Russia are also parties to talks that would create a free-trade zone with Caspian Sea neighbors Kazakhstan, Azerbaijan, Iran and Turkmenistan, an idea proposed by Kazakh President Nursultan Nazarbayev at the Caspian Summit in Astrakhan, Russia, in September.

Russia and Iran also plan to create a joint bank, Iran's Ambassador to Russia Mehdi Sanaei said in November.

China is almost ready to replace the US dollar

The Chinese know the future belongs to them, and they are beginning to flaunt it.

My Catbird Seat

My Catbird Seat,

21 March, 2015

As the US dollar’s reign as global reserve currency appears to be ending, are we seeing the beginning of a new dawn in the east?

Throughout history, global reserve currencies have proven to last for only so long. Before the United States’ currency reigned supreme, the currencies of Great Britain, France, the Netherlands, Spain and Portugal all had their day.

We don’t know exactly when the dollar’s run as reserve currency will end, but everywhere you look, there are seismic shifts away from the greenback.

For one, the number of bilateral trade agreements signed between countries is rising at an alarming rate.

And then there are the Chinese. Even just a few years ago, the Chinese yuan was not even one of the ten most traded currencies; now, as of last year, it’s number five on the list recorded by SWIFT, an international financial transaction agency. In fact, international payments settled in yuan jumped a MASSIVE 104% in 2014!

But the Chinese aren’t ones to be satisfied easily; they know what’s at stake on the global stage and are moving hastily to seize the opportunity. So later this year, China is expected to launch what will be known as the China International Payment System (CIPS), an international system that will further the yuan’s internationalization and its status as a dominant currency on the global level for cross-border transactions.

Add to this several other significant developments:

First, the Chinese are now seeking to have the yuan added to the IMF’s special drawing rights (SDRs) pool of reserve currencies. At present, that pool consists only of the U.S. dollar, the euro, the Japanese yen and the British pound.

Second, China is heading up the new alternative to the World Bank and IMF, known as the New Development Bank, which is part of the BRICS system and is run out of Shanghai.

Finally, on top of all of this, China has created the Asian Infrastructure Investment Bank (AIIB), which competes with the predominantly U.S.-controlled financial institutions and focuses on the Asia-Pacific region. As of this week, the UK and Australia have joined the AIIB, much to the disapproval of the U.S. government. France, Germany and Italy are set to follow.

All roads are leading away from the U.S. and over to China.

Speaking of roads, Simon Black of Sovereign Man recently spotted this billboard in Bangkok, Thailand:





This is an advertisement from the Bank of China, of which the government holds a stake of over 70%. The Chinese are openly telling us that the RMB (yuan) is “the world currency”!

The Chinese know the future belongs to them, and they are beginning to flaunt it.

When The World's Reserve Currency Flash Crashed: "I Haven’t Seen Anything Like It Since The Financial Crisis’  

Zero Hedge,
21 March, 2015



On Wednesday afternoon, just after the close of the market, the US Dollar, the world's reserve currency flash crashed. This is how the WSJ described the move:

In the latest episode Wednesday, a message from the U.S. Federal Reserve that it is in no hurry to raise interest rates caused a big slump in the dollar, which has run up a huge rally so far this year. The euro surged more than 4% against the buck, its biggest jump in a single day in 15 years, according to Deutsche Bank. Early on Thursday, the European currency resumed its slide.

The sheer speed of the round trip in the euro-dollar exchange rate—the world’s most heavily traded currency pair—left traders and investors reeling.

We profiled the staggering move in real-time as it was happening:
 




Again, this is the world's reserve currency, not some two-bit backwater currency pair. It was, also, a stunning, unheard of event.

This is how the rest of America's traders saw it, from the WSJ:

“I haven’t seen anything like it since the financial crisis,” said Paul Lambert, head of currency at Insight Investment, which manages $480 billion of assets.

Traders said Wednesday’s move brought back memories of January’s surge in the Swiss franc, when the currency climbed more than 40% after the Swiss central bank abandoned its policy of capping the franc’s strength against the euro. For a few minutes on Wednesday, the lack of dollar buyers caused a short-term freeze in electronic trading platforms, according to a New York-based trader at a major currency-dealing bank. “There was a lot of shouting on the desk, a lot of nervousness,” the trader said. 

“The dollar has been experiencing fastest pace of ascent in 40 years. Our long-term outlook for the euro is still lower, but risk here is for a decent pullback,” said Matthew Cobon, head of interest rates and currencies at Threadneedle Investments in London, which has a total $54.3 billion of assets. Mr. Cobon had bet on a bounce back for the euro ahead of Wednesday’s Fed meeting.

None of this was unexpected, if only to our readers: recall that as we showed in the start of the year, the short 10Y and the long USD were the two most crowded, biggest consensus trades across the spec investor community, perhaps in history.



But while everyone got crushed on the Short 10Year trade shortly thereafter, the USD trade kept working... until Wednesday, when the entire groupthink monorail slammed into a brick wall.

So now what? Well, more of the same... and prayer.

The sharp swings also raise a now-familiar complaint from investors: Regulations brought in after the financial crisis have dried up the liquidity in markets, by crimping banks’ ability to carry risky bets on their balance sheets.

 On Wednesday, the Bank for International Settlements became the latest major authority to caution that a lack of liquidity could lead to major disruptions in financial markets. 

“When flow hits the market, there’s no buffer, so it translates straight into big price moves,” said Mr. Lambert at Insight Investment. During the financial crisis, big swings were sparked by fears of a collapse of the banking system. Similar moves can now result from a minor reassessment of the Fed’s rate-increase plans, according to Mr. Lambert.

So to summarize:

1. the stock market flash crash of May 6, 2010
2. the Treasury bond flash crash of October 15, 2014
3. and now the US Dollar flash crash of March 18, 2015
   

And all of this happening as the "market" is rising, and as of today, poised to set new all time highs.

What happens when the real selling actually begins, and what little liquidity exists even now, is completely gone. The answer? Exchanges will simply close down and refuse to open or satisfy any asset liquidation demands, indefinitely, until either the Fed can once again bailout the system, or when the US government finally makes the sale of any asset, illegal.

CrossTalk: Russia's Econ

To date 2015 is turning into a difficult year for the Russian economy. The dramatic drop in oil prices has halved the value of the ruble and stoked inflation. At this point the consensus is Russia will experience a short but sharp recession. Is the government doing the right things?

CrossTalking with Yaroslav Lissovolik and David Gray