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Five Things You Need to Know: China to Shed Dollar Risk, What's the Big Deal?, Fundamentally, the Dollar..., Technically, the Dollar..., Bad Reputation


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. China to Shed Dollar Risk

China should spend some of its $1 trillion dollars in foreign exchange reserves to buy strategic resources instead of maintaining a risky foreign exposure, particularly to US assets, a delegate to China's legislature said last night, according to XFN-Asia.

  • Qin Chijiang, a Beijing-based professor and National People's Congress delegate, said last night that China's current foreign exchange reserve management policy of buying US treasuries or financial assets in other countries is "stubborn and too simple."
  • Taken alone that's not such a big deal. He and other Chinese lawmakers have made similar comments over the past few weeks.
  • However, what makes them unique in this case is that they were made to the the PBOC (People's Bank of China)-backed Financial News.
  • Moreover, they follow upon yesterday's gold and currency markets-moving comments from PBOC governor Zhou Xiaochuan that, "We [China] have had a very clear diversification plan for several years."
  • Zhou also said that China's central bank is "considering lots of instruments (for diversification)."
  • Immediately following Zhou's comments yesterday, the first time a member of China's central bank had explicitly noted a plan for diversification of China's currency reserves, the U.S. dollar fell to a two-month low and gold and other commodities spiked higher.

2. What's the Big Deal?

What's the big deal about China's currency reserves, why would diversification affect commodities markets and the U.S. dollar?

  • First, China reportedly has nearly 70% of its reserves in U.S. dollars.
  • A plan for diversification away from U.S. dollars would create a significant level of dollar supply and possibly depress the dollar against other currencies.
  • Why would they do that, though? Wouldn't a decline in the dollar negatively affect the value of the dollars they decide to hold?
  • It would, which is one reason some believe China is essentially caught between a rock and a hard place.
  • Nearly a year ago Minyanville Professor John Succo said his firm believed it would take China about two years to amass enough gold so that if the dollar dropped 50% they would come out whole with the corresponding jump in gold prices.
  • "This would put them in a position to abandon their U.S. dollar policy (lending to the U.S. consumer to buy their stuff) if they perceive the U.S. slowing to the point where their exports would stagnate anyway," he said.
  • A crucial problem for China, and one reason the country has been so slow to revalue the yuan despite pleas from U.S. lawmakers and the Treasury Department, is that exports make up about 40% of GDP and domestic demand remains too weak to take up the slack created by a dip in exports.
  • Revaluing the yuan would make China's exports less competitive.
  • Meanwhile, China reportedly has 600 tons of gold, roughly worth about $12.2 billion, according to the Wall Street Journal.
  • If the Chinese diversification plan includes accumulating more gold then doing the math suggests a rather significant floor in gold prices.
  • Minyanville Professor Lance Lewis' excellent piece, "Goldilocks Dies," notes that it is practically impossible for China to diversify into other currencies without straining already tenuous trade relationships.
  • "The logical choice for China to diversify its dollar reserves into is the only other widely recognized reserve asset held by central banks around the world and the only reserve asset held in any size by the US Federal Reserve, gold," he noted.

3. Fundamentally, the Dollar...

So, China notwithstanding, what is the fundamental case for a decline in the U.S. dollar?

  • PIMCO's November "Global Perspectives" piece outlines a clear three-part fundamental case for the dollar to resume its structural decline.
  • First, says PIMCO, the Fed's decision to pause its interest rate hikes should dissolve any support the dollar has been receiving from higher interest rates in the U.S. relative to other countries.
  • Moreover, although PIMCO doesn't mention it specifically, central banks around the world are continuing to raise short term rates. Yesterday the Bank of England raised short-term rates to 5%. The European Central Bank is expected to raise its benchmark short-term rate in December. The Bank of Japan has indicated it would prefer to raise rates sooner rather than later.
  • Second, PIMCO notes that the share of dollars in global central bank currency reserves has begun declining.
  • Third, PIMCO says that one of those privileges the U.S. enjoys today is the ability to maintain a very large liability position that is not directly impacted by exchange rates.
  • "The U.S. has a very large liability position because foreigners own more U.S. assets than the U.S. owns of their assets, to the tune of about $2.5 trillion," according to PIMCO.
  • "However, almost all of that liability is denominated in the U.S. dollar, which means dollar depreciation does not, by itself, increase the value of this debt. Instead, dollar depreciation increases the dollar value of U.S. assets abroad, and thus tends to slow the growth of the U.S. net international investment liability."
  • From PIMCOs standpoint, as one of the world's largest fixed income managers in the world, one of the investment implications of a weaker U.S. dollar is the significant erosion of purchasing power of investor returns from a fixed income stream.

4. Technically, the Dollar...

Meanwhile, let's take a look at the dollar from a couple of different technical standpoints.

  • The fundamental case for a dollar decline as outlined above are well-known by market participants.
  • What we found interesting, technically, is that since August, on a short-term basis, the U.S. Dollar Index had been defying expectations of a collapse.
  • In fact, the dollar has actually made higher lows since May, despite the decline in global dollar reserves, despite the U.S. liabilities, despite the Fed's decision to pause its tightening campaign.
  • The point & figure chart of the U.S. Dollar Index shown below (from illustrates the higher lows the U.S. Dollar Index has shown since May and also shows precisely where that trend will be broken technically.
  • A move below 84.50 would erase months of technical improvement for the dollar.
  • That was the short-term point & figure view. Even with the past six months of improvement, the primary trend for the dollar remains decidedly negative.
  • The chart below, a .5x3 scale chart from, shows how significant the 87 level has been for the dollar index. Obviously, there has been significant supply at that level. The trend on this longer-term chart remains negative.

5. Bad Reputation

According to, 26 percent of hiring managers say they have used search engines to research potential employees, and one in 10 has looked on a social networking website, reported.

  • This is bad news for you, Mr. Slip and Slide.
  • It's also bad news for me.
  • And especially bad news for you, Minyanville co-worker Brian "Farley" Bauman (pictured at left).
  • Fortunately, there's a new startup Web-based service for people just like us.
  • It's called
  • According to Wired, ReputationDefender will act on your behalf to scour the web for embarrassing photos and faux pas, office party hijinks and "saucy comments."
  • The company produces monthly reports on its clients' online identities for a cost of $10 to $16 per month.

Minyanville's Todd Harrison at
Minyans in the Mountains I before
learning of

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No positions in stocks mentioned.

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