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The next global currency shift

By Philip Saunders - Co-Head of Multi-Asset Growth
Russell Silberston - Co-Head Developed Market FX & Rates, Fixed Income
Mike Hugman - Fixed Income Portfolio Manager
Sahil Mahtani - Investment Institute Strategist*

The fast view

  • Structural and cyclical drivers could see de-dollarisation gathering pace over the next few years.
  • Our research looks at three potential scenarios and their investment implications.
  • Scenario one anticipates full renminbi internationalisation; scenario two looks at renminbi regionalisation; and scenario three involves a reduced role for the dollar.
  • The three aren’t mutually exclusive. But the most likely scenario is the second one, a managed internationalisation of the renminbi, with the focus on regionalisation among China’s close trading partners.
  • We anticipate a major geopolitical development that is likely to require a new approach to asset allocation, both globally and regionally.

While the dollar enjoys unipolar dominance, as outlined in Why the US dollar remains centre stage, the next currency transition may not necessarily result in a ‘winner takes all’ outcome. Our paper, What is driving de-dollarisation?, looks at the structural and cyclical drivers that could see de-dollarisation gathering pace over the next few years. Given the historical context, and structural and cyclical drivers, how should we expect the next global currency shift to pan out?

Three scenarios and their investment implications

 

In conclusion

After nearly seven years of a dollar up cycle and a de-rating in emerging market assets, investors should be aware that the nature of the opportunity unfolding could be structural rather than purely cyclical. In 1985, the United States arguably crossed the Rubicon from being the currency of a leading world creditor to a major world debtor. The US net foreign debt position has only grown since then, thereby undermining the fundamental basis of the dollar’s status as the primary reserve currency.

In anticipating what now plays out, it is worth keeping in mind that the three scenarios above are not mutually exclusive. For instance, it is possible that full Chinese capital account liberalisation occurs during a period of a prolonged dollar decline. Ultimately, we think the most likely scenario is the second one, a managed internationalisation of the renminbi, and specifically a regionalisation among China’s close trading partners. That is a major geopolitical development that is likely to prompt a decline in risk premia across emerging Asia as well as a general transformation of economic cycles in the region. As such, it is likely to require a new approach to asset allocation, both globally and regionally.


1 Chinn, M., Ito, H., “The Chinn-Ito Index: A de jure measure of financial openness” While China’s assets are greater than its liabilities, an average is used as a proxy for China’s relationship to the global economy.
2 Cerutti, E., and Obstfeld, M., “China’s Bond Market and Global Financial Markets,” IMF Working Paper No. 18/253, International Monetary Fund, 7 December 2018.
3 “Bloomberg to Add China to the Bloomberg Barclays Global Aggregate Indices,” Bloomberg, 23 March 2018.
4 Liu, Z., Spiegel, M.M., and Zhang, J., “Optimal Capital Account Liberalisation in China,” Working Paper 2018-10, Federal Reserve Bank of San Francisco, August 2018.
5 Wildau, G., “China’s renminbi liberalisation leaves capital controls intact,” Financial Times, 22 June 2015.
6 Chung, G., Cui, C., “Currency War: US hedge funds mount new attacks on China’s yuan,” Wall Street Journal, 31 January 2016.
7 Data Tables, “China exports, imports, and trade balance by region 2016,” World Integrated Trade Solution, World Bank.
8 Eichengreen, B., and Lombardi, D., “RMBI or RMBR: Is the renminbi destined to become a global or regional currency?”, NBER, Working Paper 21716.
9 Eichengreen, B., and Lombardi, D., “RMBI or RMBR: Is the renminbi destined to become a global or regional currency?”, NBER, Working Paper 21716.
10 “Southeast Asia wary of China’s Belt and Road project, sceptical of US: Survey,” Reuters, 6 January 2019.
11 Steil, B., and Walker, D., “The spread of central bank currency swaps since the financial crisis,” Council on Foreign Relations, 2015.
12 Gopinath, G., “The International Price System,” Harvard University and NBER, 2015 Jackson Hole Symposium, November 2, 2015.
13 This section owes much to the thinking in Goldberg, L., Choi, M., and Clark, H., “What if the US Dollar’s global role changed?” Liberty Street Economics, New York Federal Reserve, 03 October 2011.
14 Bernanke, B., “The dollar’s international role: An ‘exorbitant privilege’?” Brookings Institute, 7 January 2016.
15 Financial Accounts of the United States, Z.1, L.109 Monetary Authority (1), as of the third quarter of 2018.
16 Gopinath, G., “The International Price System,” Harvard University and NBER, 2015 Jackson Hole Symposium, November 2, 2015.
17 Eichengreen, B., Mehl, A., Chitu, L.,” Mars or Mercury? The geopolitics of international currency choice,” Voxeu, 2 January 2018.
18 Boz, E., Gopinath, G., and Plagborg-Moller, M., “Global trade and the dollar,” Voxeu, 11 February 2018.


*Other contributing authors
Greg Kuhnert | Peter Eerdmans | Michael Spinks | John Stopford | Iain Cunningham | Wilfred Wee | Tom Nelson | Michael Power | Imran Ahmed


Important information

This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein. All rights reserved. Issued by Investec Asset Management, March 2019.

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