Move Over Dollar, Here Comes the Petroyuan

The currency swap deal between China and Saudi is only the beginning. [The Rude Awakening] November 27, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Move Over Dollar, Here Comes the Petroyuan [Sean Ring] SEAN RING Last week, China and Saudi Arabia inked a currency swap deal to shore up economic relations between the two trading partners. China and Saudi Arabia are each other’s largest trading partners, so this makes complete sense. But it knocks the USD out of the picture. Though it’s a small move now, this has enormous implications for the future. First, let’s define currency swap lines between central banks and show why they’re used. The Ins and Outs of Currency Swaps Currency swaps between central banks are a form of financial agreement where two central banks exchange currencies. This arrangement allows each bank to gain access to foreign currency liquidity, which can be vital, especially during times of financial stress or uncertainty. Here's a breakdown of how they work: - Exchange of Principal Amounts: The two central banks initially agree to exchange a specified amount of their currencies at a set exchange rate. For instance, the Federal Reserve might swap US dollars for euros with the European Central Bank. During the 2008 crisis, European banks needed dollars to maintain liquidity. - Use of Funds: Each central bank uses foreign currency for various purposes, such as providing liquidity to their domestic banks, stabilizing their own currency, or supporting international trade and investment. - Interest Payments: During the swap period, each central bank may pay interest to the other on the swapped amounts. The interest rates are typically determined based on market rates like the Secured Overnight Funding Rate (SOFR) and EURIBOR. - Reversal of the Swap: The swap is reversed at the end of the agreed period, and the principal amounts are exchanged back at the original exchange rate. This means the exchange rate risk is mitigated since the rate is locked in from the start of the agreement. Also, these agreements can be rolled over for as long as need be. What are the benefits of currency swaps? Currency swaps help central banks manage liquidity risks, stabilize their currencies, and support their banking systems in financial strain. They also enhance cooperation between central banks, promoting financial stability on a global scale. As a crisis management tool, these swaps became particularly prominent during the 2008 financial crisis when central banks worldwide used them to provide liquidity to their banking systems in various currencies, especially US dollars. In essence, currency swaps are a tool for central banks to ensure financial stability, manage exchange rate risks, and maintain liquidity in different currencies as needed. 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The People’s Bank of China (PBOC) and the Saudi Central Bank (SAMA) signed a three-year swap agreement for a maximum value of 50 billion yuan (US$6.97 billion), or 26 billion riyals, according to statements on Monday by the two monetary authorities. The pact, which can be extended by mutual agreement, reflects the strengthening collaboration between the two central banks, SAMA said. The Saudi central bank was looking to strengthen its connections with the PBOC via bilateral dialogues, collaborations in multilateral forums, as well as partnerships in international organizations, SAMA’s governor Ayman bin Mohammed Al-Sayari said in an interview last month. The agreement with SAMA is the 30th swap signed by the PBOC over the past decade, as China quickened the pace of the yuan’s worldwide usage. The Chinese central bank already has swap agreements with several countries in the Middle East: the United Arab Emirates in 2012, Qatar in 2014, and Egypt in 2016. In [today’s editorial piece, the SCMP]( wrote: In immediate terms, the pact will foster bilateral commerce denominated in both the yuan and the riyal. In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other. In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift. It has been a very long time coming. It continued: However, the latest currency swap pact will be the most important. It means trade can be conducted in local currencies, instead of defaulting to the US dollar. This may be seen as a challenge to US dollar dominance. Perhaps in the longer term, it is. But there is a good economic reason. The current US federal interest rate of 5-plus percent has pushed the dollar to historical levels against most other currencies, making trade denominated in the dollar more expensive. There are obvious advantages for two big trade partners like China and Saudi Arabia to be able to utilize a local currency option, which will help relieve pressures from having to trade in a more expensive currency. Global “de-dollarisation” may take a while yet, but the trend already reflects cracks in a global economy long used to US currency settlements. The yuan may or may not pose a challenge to dollar hegemony, but its internationalization continues apace – to the benefit of both the Chinese and global economies. We know de-dollarization is a slow-moving beast. But what if the game plan is much, much more grand? China’s Big Play Tom Luongo of the Gold, Goats, and Guns blog is a prolific economic thinker. Here’s only a tiny part of a [mindblowing blog post]( about the Chinese Grand Plan: - China is using their US Treasuries and US dollar surpluses to loan them to Emerging Market trade partners of significance to CHINA! - They are asking for yuan in repayment. - This stabilizes the yuan/usd exchange rates while China can and is rapidly expanding the money supply to deal with their sagging property markets as a result of the Fed’s aggressively tight monetary policy. - In order for China to expand the yuan into the new dollar vacuum without also losing their gold (Luke Gromen’s point during the conversation), they have to create a demand cycle for their debt, keeping borrowing costs low. - Since they have cross-currency swap lines with their SE Asian partners and offshore yuan settlement around the region, i.e., in places like Singapore, this is how they manage the expansion without creating a runaway inflation problem. - Yuan replace dollars without a massive shift in exchange rates and/or bond yields. Not only does this almost silently move the reserve status to the CNY, but it also inoculates China and its important trading partners from the danger of USD sanctions. Wrap Up And so it begins. We didn’t get a BRICS currency in August. But we may have got something far more subtle - and lethal - to the USD. If this plan works, we may see the global financial system remade far sooner than I thought. Let’s keep a weather eye out for more developments. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… Get Your Top Trades Here, Folks! [Sean Ring] SEAN RING I hope you enjoyed a Thanksgiving feast for the ages yesterday. Today, instead of reading a big Rude, I present you a video with my friends and colleagues, Paradigm’s Fearless Leader, Matt Insley, and Greg Guenthner, Daily Reckoning contributor and Head of Paradigm’s The Trading Desk. [Click here to learn more]( Click the pic or [here]( to watch the video. [Could You Spot These 2 AI Investing Traps?]( Here’s something no one else will tell you about artificial intelligence. Investing in AI… is BS. Almost every investor out there is falling into [2 AI investing traps](. And they’re going to lose their shirts. Before you spend one nickel on AI… [click here to see tech genius James Altucher’s urgent warning to investors](. [Click Here To Learn More]( Here’s a choice quote from their talk: I know the news has been crazy this year, but we had that mini-banking crisis back in the spring that sort of put things on pause. But as you can see here, and this is the NASDAQ 100, these are the biggest tech stocks in the world right here. The market absolutely ripped higher into the summertime, and then we topped out where the market should have been topping out in July. And when I say that I'm talking about seasonality. This is a pre-election year. Generally in a pre-election year, you tend to see markets move higher during Q1 and Q2 and then level off in the summer. They tend to go down in the early fall and then snap back and close at the highs in November/December with a big end-of-year meltup. It doesn't always happen that way, but seasonality is very useful if you look at these patterns and you say, Hey, where could the market possibly be going and use that kind of as a roadmap. And when we have a year like this year that's followed seasonality so perfectly, it's been much easier to gauge where these potential turning points could be. But again, a big rally to start 2023 topped out in July. And then August/September things got a little bit wonky, and then all the bears came out of hibernation in October. Here’s another one: Everybody's been so focused on the NVIDIAs. I mean look at this, when stocks were correcting pretty hard back in October, Nvidia really wasn't doing that much. It was still in this nice consolidation range that we see right here and we see the surge here from earlier this year. I mean at the start of the year it was $140 and we know what's happened since then. Nvidia sucked all the air out of that AI bubble and took all of those investors and everybody wanted to be in Nvidia. This is the one stock that everybody's had to own. They've had to own it all year long and they hid out in it when the market got wonky here in August, September, and October, and now it's pushing again into new highs. I mean it's been an incredible performer, but if you're thinking tactically and you're thinking what's going to be the next thing that moves the next great trade on the market, I don't think it's going to be in Nvidia. I don't think it's going to be Apple. I don't think it's going to be Meta. I think it's going to be the smaller stocks. I think it's going to be the tech survivors, the stocks that got smashed in 2022 and had trouble getting off the mat after the summer rally here in 2023. I think it's going to be those stocks, the ones that survived this period right here and have gotten beaten down, the stocks that are down 60, 70, 80% from those highs. On Crypto: Crypto winter was a big thing and the question throughout the end of 2022 and early 2023, I had, was enough of that speculative money completely burned out of the crypto space to give this thing a shot at setting back up again. On the long side, a lot of people may not have noticed this, but right here, this big move in Bitcoin from $27k all the way up to $37k is a $10,000 move in Bitcoin almost that happened before stocks bottomed out in October. We had crypto traders pushing Bitcoin higher in the face of what looked like a breakdown in the stock market. Something like that really gets my attention because it doesn't add up. Your average crypto trader or investor, whatever you want to call them, is a speculator, and usually, the Bitcoin trade and the tech growth trade hold hands, they kind of do the same thing, maybe not in orders of magnitude, but they tend to directionally go the same way because it's the same type of trader. Wrap Up I encourage you to take some time today to [listen to Greg’s market analysis](. Few people do it better than he does. Have a lovely weekend! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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