As we reported earlier, The Independent appears to have rocked the world on Tuesday with its Robert Fisk exclusive exposing a secret plot by international central banks to topple the US dollar.
As we’ve stressed, denials have been coming out thick and fast from all the central banks involved. What’s more, the concept of pricing oil in an alternative currency to the dollar is hardly a new one.
Nevertheless, over the last 24 hours the dollar index was significantly underperforming its basket:
So what to make of it all?
Here’s some of the market commentary doing the rounds on the matter on Tuesday morning (our emphasis throughout).
First up, a rather alarmed Dennis Gartman of the Gartman Letter:
IT IS UNANIMOUS: “THEY” HATE THE US DOLLAR and it appears that a fully fledged attack is being made upon the US currency this morning, with money flowing anywhere and everywhere… but particularly to the non-US dollars, the Canadian, the Aussie and the New Zealand dollars. Fears of problems in the Middle East; fears that the world is turning away from the US dollar as the policies being followed by the left-of-centre Obama Administration; fears of fears.. it makes no difference at this point. The rout is on, and it is not a pretty sight to behold.
Too, the dollar is being hit by a report given wide and wider currency this morning in London’s The Independent, noting a meeting held by the Gulf States, China, Russia, Japan and France “to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese Yen, the Chinese Yuan, the EUR, gold and a new unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.” This is not new news of course, for such a change from dollar pricing to some other methodology has been discussed, rumoured, tossed about for months, but this time we note that Japan and France are involved in the meetings and that changes the tenor of the rumours entirely. Too, the addition of the Saudis and the Emirates AND Kuwait to the meetings adds further importance and seriousness to the threats.
The article in The Independent becomes quite serious in that The Independent has not been given to such rumours in the past. This is not The Sun, nor the NY Post. The Independent is a reasonably credible news source and we suspect that the leaks made to the newspaper are to be taken quite seriously. Certainly the markets are taking it as such, and we should also.
BNY Mellon, meanwhile, do not make much of the central bank denials:
Given the enormity of events these past two years, it is entirely understandable that investors took to the sidelines ahead of meetings of the G20 and G7 whose contingent were seemingly armed with a greater will to effect change. Yet given that these meetings appear to have actually contributed to a reinforcement of the status quo, then there seems little reason to believe that investors will not resume their prior activities. As such, this continues to bode ill for the USD.
Of course, in any case, the greenback hardly got off to a good start today in view of an article in the Independent newspaper (see Headlines) — an article of huge, potential significance given that Gulf States share the dilemma of fellow USD-hoarder China (whose ‘protestations’ over the greenback’s stability have grown all the louder in 2009). Yet in view of the likely implications for OPEC’s immediate interests, the subsequent denials (see Headlines) were hardly that surprising; and in fact, what was most notable about the morning’s episode was that despite this clear, official denunciation, the New York session approached with the USD trading only a hair’s breadth above its morning’s lows.
On the commodities side, Olivier Jakob at Petromatrix observes:
The trading patterns of the past two weeks have clearly been for a strong directional push on the DOE day and the rest of the week spent on trading the Dollar Index. There was very high buzz on the Dollar Index overnight with the story printed in the Independent (UK) hinting that secret meetings had been held between Gulf states, Russia, China, Japan and France to move away from dollar priced oil and this by 2018. We find the article too loosely written but most traders will react to the headline. This is how strong market rumors are created and this is leading to a race of denial from all Central Banks in our early morning. With the ECB meeting on Thursday, we should expect volatility on the Dollar Index to continue and this will make trading the direction of crude oil (apart from inversely following the Dollar Index) difficult until the API/DOE can offer more meaningful inputs.
While BNP Paribas puts it all in some sobering context:
The USD faces selling pressure on the back of an article released in the UK’s Independent suggesting that various countries are negotiating to use a basket of currencies to replace the USD pricing of oil and other commodities. The article concluded that the USD would lose about 50% of its value within 10-years if commodities were traded in non-USD currencies. While a 50% depreciation looks frightening it represents a yoy depreciation rate averaging 5%, which would be less than the recent USD depreciation rate.
The discussion regarding the USD losing its commodity pricing function is not new having first come to the surface in 2003 when Russia moved its RUB peg from the USD towards a basket of currencies. Russia energy clients are EUR based and hence Russia is paying for most of its imports in Euros and it does not make sense for Russia and its energy clients to pay energy imports and exports in USD’s.
Nonetheless, despite this huge commercial interest, using the EUR for its energy exports, Russia still receives USD’s. What investors should not forget is that Saudi Arabia, which is the world biggest oil country in respect of production of reserves, has an interest to keep the US strong and involved in the region. Switching the USD for a basket of currencies for commodity factoring would weaken the US additionally, which would be against the interest of Saudi Arabia, but Saudi Arabia will be the key country when discussing which currencies oil should be factored in. Hence, we regard the ‘Independent’ article as offering little substance. Nonetheless, the article will add to USD weakness, which is already under pressure due to other reasons.
And Barcap reminds that Fisk is not a financial reporter:
The dollar’s weakness overnight seems primarily related to a report in the Independent, a British newspaper, that Gulf states were in secret talks with other countries, including Russia, China and Japan, to move oil trading from dollars to a basket of currencies, including the EUR, JPY, CNY, gold and a new, single currency planned for the GCC. Denials have already started to appear on newswires, with officials from Saudi Arabia and Russia, talking down the report, according to Reuters. Little detail was provided about the sources for the report (referred to as “Gulf Arab and Chinese banking sources in Hong Kong”), but the author is a long-standing and well-known Middle East correspondent, which partly explains why the market is attaching some credence to the report — although he has not often written on economic issues in the past.
There have already been bilateral steps taken by some EM countries towards denominating trade in local currencies, rather than the USD. But a change in the predominant unit of account for the commodities market would clearly be far more significant. An eventual move towards oil being traded in a wider range of currencies is possible, but in our view, the Independent article makes it sound far more imminent than it likely is. In particular, the political consensus needed to achieve this would be very difficult, especially at a time when there is an apparent lack of consensus on more proximate issues for GCC countries, such as the Gulf Monetary Union.
Our emerging EMEA economists expect the 2010 deadline for the single Gulf currrency, which the Independent article suggests will be part of the currency basket for oil trades, to be postponed. Nonetheless, the report will likely add to concerns about the future role of the dollar in international financial markets, especially in the face of evidence from the IMF’s COFER data that EM central banks appear more aggressive than in the past in shifting out of the USD into other G10 currencies (see FX Weekly Brief).
More to be added as it comes.
Related links:
Major blow to Gulf common currency - FT Alphaville
A commodity anchor or oil as money - FT Alphaville
Energy as currency - FT Alphaville
Global currency it could happen - FT Alphaville
