The economic balance of power in the world has changed in the last 20 years. China’s rise entitles it to a seat at the table among the largest economies of the world: the US, Europe, Japan, and the United Kingdom. That will be confirmed soon by the addition of China’s currency (the yuan) to the basket of currencies which make up the special drawing rights (SDR). SDRs are a kind of global reserve asset issued by the International Monetary Fund (IMF).
SDRs are currently composed of US dollars, British pounds, Japanese yen, and euros. According to wire service reports, an IMF staff review – which will be sent to the board for action this week – recommends the yuan be added to the basket. The US dollar would have a 40% weighting, the euro 30%, the yuan 14%, the pound 9%, and the yen 7%.
It doesn’t look like any currencies (or countries) will be kicked out of the SDR club to make way for China. But what happens next? China’s inclusion should spur demand for its currency. In a case of ‘what is unseen’ consequences, it could result in global investors owning a lot more Chinese bonds. And thus the transmission mechanism for a Chinese crisis to the global market will be created.
Nice one, IMF
Currency traders don’t see any big moves for the other currencies, at least not based on the re-weighted IMF basket. It’s all about interest rates right now. The consensus is that US rates will go up when the Fed next meets on 15 and 16 December. Meanwhile, rumour of a weaker euro abound as the European Central Bank (ECB) prepares to meet. In the podcast we discussed whether the ‘strong dollar’ trade was already crowded.
Category: Central Banks