China just dropped an absolute bombshell, entirely ignored by the mainstream media in the United States. The central bank of China has decided that it is “no longer in China’s favor to accumulate foreign-exchange reserves”. So in other words – China sees little need to continue “hoarding” USD as they have in the past ( in order to keep their own currency suppressed ) and is likely to stop purchasing U.S Debt as well.
As well China also announced last week ( again – completely ignored in mainstream media ) that they will soon look to price crude oil in Yuan on the Shanghai Futures Exchange, bypassing the need for exchange in USD.
The implications and ramifications are massive.
- China is now the number one importer of oil in the world, and will soon openly challenge use of the petrodollar.
- Dropping the purchases of U.S denominated debt leaves only the The Fed (as no one else in there right mind is buying U.S Treasuries ) so we can likely expect further downside in bond prices…and of course the dreaded inverse – rise in interest rates.
- When China starts dumping dollars and U.S denominated debt, it’s pretty safe to say the rest of the world will too.
- Allowing the Yuan to in turn “appreciate in value” will make all those wonderfully cheap products sold in The United States much more expensive.
In all….this is likely the largest , most significant story / issue now facing the U.S as China’s “backstop” to the U.S Dollar and never-ending purchases of U.S Debt “until now” have been primary drivers in supporting “whatever it is you call this” economic recovery.
Pulling the rug on U.S Dollar and debt purchases is without a doubt the move that “takes the queen”.
Checkmate next.
The Domino Effect: What Happens When the Dollar’s Foundation Crumbles
Currency War Escalation: USD/CNY and the New Reality
The USD/CNY pair is about to become the most watched currency cross on the planet. For decades, China artificially suppressed the Yuan by maintaining a peg around 6.20-6.90 to the dollar, but those days are numbered. When China stops intervening to weaken their currency, we’re looking at a potential appreciation that could see USD/CNY drop below 6.00 for the first time in years. This isn’t just a technical break – it’s a fundamental shift in global monetary policy that will ripple through every major currency pair. The Dollar Index (DXY) has been artificially propped up by China’s currency manipulation, and without that support, we’re staring at a potential collapse below the critical 90 level that could trigger a wholesale flight from dollar-denominated assets.
Smart money is already positioning for this reality. The carry trade strategies that have dominated forex markets for the past decade are about to get turned on their head. When the Yuan strengthens, it’s not just USD/CNY that gets hammered – every dollar cross becomes vulnerable. EUR/USD could easily blast through 1.25 and keep climbing, while GBP/USD might finally break free from its post-Brexit malaise. The Swiss Franc and Japanese Yen, traditional safe havens, will likely surge as investors flee dollar exposure across all asset classes.
The Petro-Yuan: Destroying Dollar Hegemony One Barrel at a Time
China’s move to price oil in Yuan on the Shanghai Futures Exchange isn’t just about convenience – it’s economic warfare disguised as market innovation. The petrodollar system has been the backbone of American financial dominance since Nixon took us off the gold standard in 1971. Every barrel of oil traded in dollars creates artificial demand for U.S. currency, allowing America to export inflation and maintain artificially low interest rates. When China starts settling oil trades in Yuan, they’re not just challenging the dollar – they’re offering the world an exit strategy from American monetary policy.
The mathematics are brutal. China imports over 10 million barrels of oil per day, and if even half of those transactions shift to Yuan settlement, we’re talking about removing billions in daily dollar demand from global markets. Russia has already signaled willingness to accept Yuan for energy exports, and Iran is desperate for any alternative to dollar-based sanctions. Once this snowball starts rolling, oil exporters from Venezuela to Nigeria will have no choice but to follow suit or risk losing access to the world’s largest energy market.
Bond Market Carnage: When the Fed Becomes the Only Buyer
The bond market is about to experience what economists politely call “price discovery” – and it’s going to be ugly. China has been the marginal buyer keeping U.S. Treasury yields artificially suppressed, holding over $1 trillion in U.S. government debt. When they stop rolling over maturing bonds and start actively reducing their holdings, the Federal Reserve will be forced into permanent quantitative easing just to prevent a complete collapse in bond prices. The 10-year Treasury yield, currently hovering around these historically low levels, could easily spike above 4% or even 5% as real price discovery kicks in.
This creates a nightmare scenario for the Fed. Higher yields mean higher borrowing costs for the government, which means either massive spending cuts or even more money printing to service existing debt. It’s a death spiral that ends with currency collapse or hyperinflation – possibly both. Corporate bonds will get absolutely destroyed as risk premiums explode, and the housing market will crater as mortgage rates follow Treasury yields higher. The everything bubble that’s been inflated by artificially low rates is about to meet the pin of market reality.
Trading the Collapse: Positioning for the Post-Dollar World
Professional traders need to start thinking beyond traditional dollar-based strategies. The Yuan is becoming a reserve currency whether Western central banks acknowledge it or not, and commodity currencies like the Australian Dollar and Canadian Dollar will benefit from increased trade settlement outside the dollar system. Gold is obvious, but silver might offer even better returns as industrial demand from China’s green energy transition combines with monetary debasement fears.
The volatility in major currency pairs is going to be extraordinary. Risk management becomes paramount when fundamental assumptions about global monetary policy are shifting in real time. Position sizing needs to account for gap risk and sudden central bank interventions as governments desperately try to maintain some semblance of orderly markets. This isn’t just another market cycle – it’s the beginning of a new monetary era.
Hey Kong,
Thanks a lot for this blog. Your perspective is very validating. I noticed Dr. Paul Craig Roberts mentioned this agreement too. (I read him vigorously since you recommended back in October).
There was also a really interesting op-ed in The Moscow Times yesterday. An opposition MP wrote it, saying “The U.S. national debt, now at more than $17 trillion, cannot keep rising indefinitely. We think that Russia must raise the portion of its reserves held in gold and reduce its dollar reserves. We believe that a currency from one of the BRICS countries can become a reliable alternative world reserve currency,”
Read more: http://www.themoscowtimes.com/opinion/article/the-dirty-and-dying-dollar/490000.html#ixzz2lfUt8bSp
Crazy stuff, right? And everybody is talking about it except the North American media. The only conflicting thought I sometimes have is…
How do we have any real faith in the Chinese economy? Manipulated data being put out by the US does not preclude China from doing the same, does it? Plus, there are some serious demographic headwinds, massive societal inequality (keeping their security apparatus distracted) and some geographic factors that make China future as a global power a little more blurry. Well…
Whatever the answer it sure is fun to think about and try to profit from 🙂
Thanks again for providing such a great place for this meaningful discussion!
J
The Chinese don’t want to become the world’s reserve currency, as this responsiblity ( as well the opening of capital accounts etc…) is not of particular interest to the Chinese so….moving towards a “more convertable” Yuan is the move at hand – I don’t think “global domination” is really the objective.
The bottom line is “moving away from USD” is now more than a given and the ramifications are huge. Who can possibly fill the void with respect to the future purchase of U.S Debt? As well the implications of the Chinese just “letting the dollar fall” – wow.
As far as “faith in the Chinese economy” goes…all I can really say/do is consider that China is a massive “engine of growth” moving forward, even with lower estimates of future GDP – and go with that.
The inequality currently sweeping across the U.S is unprecedented, while millions of Chinese are experiencing prosperity for the first time in history, and with future “reforms” moving in the right direction.
I’m curious ….what are you thinking with respect to “geographic factors”?
Thanks for your response Kong. I’m still new to the currency stuff so my apologies when I have trouble perceiving the shades of grey. At the end of day I definitely hear what you are saying about “moving away from USD” and the enormous implications.
My thoughts on geography (pretty much summed up by the “China as an island” argument) are more or less a moot point if China isn’t concerned with power projection on any kind of global scale. And the more I reflect on the writing and comments here, the more I realize it might make sense that they’re not!
Very Interesting article.. Thanks, your blog is defiantly a great source of information…
If you dont mind, can I ask you which base currency do you keep your trading accounts
Kong! very thought provoking post! i also read somewhere that the proceedings of the Chinese plenum included 1) possibly allowing non government orgs to develop to handle social needs and 2) legal system reforms to curb political corrruption. the US needs to stop relying on money printing and start putting meaningful fiscal reform in place or the rest of the world is going to clean our clock
If they stop hoarding reserves, all that means is that they intend to narrow the trade surplus by increasing imports (and therefore domestic investment) or facilitating capital flight (foreign investment). Perhaps they finally realize how expensive it will be to clean up their own bubble. The euro is the only currency with any hopes of replacing the dollar right now.
Exactly….I don’t expect a “replacement” short of the IMF’s “SDR’s” possibly serving as some alternative should “the shit really hit the fan”.
As the EUR is the second most widely held reserve, it will obviously be a gainer as USD continues lower – but considering the intrinsic problems with the EU Zone in general ( with 17 independent countries sharing a single currency ) it certainly won’t take the top spot.
Great post, Kong. Was expecting to see this sort of thing happening but certainly not this fast. Thanks for the post. Really useful.
And even at that…..I’m pretty sure it will happen “slower” than we’d necessarily like as traders.
But cleary the writing is on the wall.
Ya sadly trading these changes is an entirely different ball of wax.
Equity mkts are stuck….yen still being suppressed down
Am I correct–stopping buying more USD is NOT the same as selling what they have. I wonder if this is a coordinated policy with the FED to import inflation, since the idiots think that’s a great idea…
Its not policy yet. one of their heads said it in a meeting. Its not a bomb shell . ITs not policy yet or next month. As Jim Rickards points out , ” to make a policy one has to have the desire and capability ” . How could they do that at this point? Rickards also points out 10 years might be possible.
Yes I apologize for the “sensationalism” as this “is” the Internet….
Hard enough getting people to “read at all” about these kinds of things let alone talking about it.
The implicatations are considerable if only with respect to the purchase of debt “lessening”.
Who’s stepping in? Who’s filling the void?