With the dollar tumbling overnight, many were scratching their heads as to what caused the move in the dollar. Citi's Stephen Englander provides a useful explanation, which fits perfectly with the commentary from PBoC advisor Li's earlier that the dollar's position as a reserve currency is now "absurd": namely that more and more in the world are starting to look at the CNY as the new reserve currency. And as we pointed out earlier, its fixing surge of over 0.5% overnight caused many to blink. Is China finally pushing to aggressively force the dollar out?
From Steve Englander's note today:
Why CNY?
We have cited but not explained the phenomenon of CNY leading G10 currencies. That was very clear overnight with the sharp downward move in USDCNY very clearly leading the move in EUR and AUD (and equity markets for that matter.) Investors appear to be viewing CNY gains as broadly bearish USD and bullish risk. The response to CNY can be partially explained if we assume that investors see CNY as setting the effective limit for how much other currencies can appreciate. It is less clear why global risk should be driven by CNY, except if investors see more global cooperation as a positive signal.
To be sure, Englander has had it in for the dollar for a long-time. He follows up in his note that in his view the USD sell signal has been triggered. While we don't disagree, we ask - what will said reserve managers buy: EURs? GBPs? JPYs? After all, all of them are just as bad. Oh wait, gold?
