Capital Properties FX
Capital Properties FX

Chinese Yuan Entered the SDR Currency Basket

For seventeen years the composition of the IMF’s SDR currency basket remained unchanged. The last new currency that entered the “exclusive club” was the euro in 1999. Back then, it replaced the German mark and French franc. However, all that changed two weekends ago as Chinese yuan (also known as the RMB) became the newest member of the SDR currency basket.

The new proportions of the basket were actually released several months ago. And hence the event itself had very limited (if any at all) impact on the markets on Monday morning. Euro was clearly the biggest loser while the U.S. dollar position in the SDR stayed virtually unchanged. Yuan, however, is now the 3rd largest component of the entire basket.

The membership of the SDR is more or less symbolic or a question of prestige if you will. In itself, it is rather logical that the Chinese yuan became part of that family as the size of China’s economy has caught up with the U.S. and EU. Hence adding their currency to the SDR basket is clearly justified and makes perfect sense.

Chinese Yuan

Yuan will Become More Influential

Firstly, China has worked hard to bring yuan into the world’s attention. The Chinese government wants to show it as a solid currency and as an equal competitor to the U.S. dollar and euro. Without a doubt, being part of the SDR is definitely helping their cause to attract investors and companies around the globe to use yuan more often as a base currency. However there’s still a long road ahead!, the USD, Euro, and Pound are still the most used currencies to make payments worldwide.

Now that the Chinese yuan is part of the SDR it should encourage governments, financial institutions, and private organizations to increase their holdings of the currency. Through that yuan should slowly expand its global reach and hence its influence over the entire financial system. While the creation of the BRICS was perhaps the first small step to “grow” yuan globally, then the membership of the SDR is definitely a large step forward.

U.S. Non-Manufacturing & Manufacturing PMI’s Back in Play

Exactly one month ago both services and manufacturing PMIs in the U.S. suddenly plummeted. That, in turn, caused a lot of fuzz and questions regarding the health of the U.S. economy quickly took over the main headlines. Four weeks later we are back in the same spot! But this time, the surprise is positive as both PMI’s bounced back and quite aggressively.

While the recovery in optimism in the manufacturing sector was considerably smaller compared to the services sector, it’s still worth mentioning that the Manufacturing PMI is back above the 50 level (51.5). ISM Non-Manufacturing PMI, on the other hand, surged like a madman from 51.4 to 57.1. The current number is also the highest reading for 2016.

The recovery in the services PMI (on monthly basis) is by far the largest since the financial crisis. Clearly, the optimism there spilled over to the “December Rate Hike Club”. What is also worth mentioning is the fact that both reports, showed an increase in the employment component as well. This means that the labor market cannot be the issue for the FED to postpone the rate hike this year.

Non-Farm Payrolls Came in Weaker

Even though last Friday was more or less about the surprise spike lower in Pound, the NFP still managed to create some excitement. While the real figure was slightly lower than expected (156K vs 171K) the overall pace of job creation can still be considered as solid.

Starting from 2014 to the present day, the monthly average figure for the NFP stands at 213 000. You can look at this number from whatever perspective you like it’s still a strong result. However, is this good enough for the FED to hike the rates in December is, of course, a totally different story!

This week’s main event is the release of the minutes of the previous FOMC meeting. Since then, several members of the Federal Open Market Committee have stated that in September, the actual rate hike was closer than we think. Now that we have the chance to see the minutes on Wednesday, we’ll find how close they really were.

However, I wouldn’t hold my breath with this release. Since the last meeting, the market hasn’t been overly interested in what the FOMC members have to say. Chances are that the minutes won’t reveal anything new either as the statement itself was pretty much the same copy of the previous one.

But of course, always be prepared for surprises!