RMB rises to reserve currency status
This is the biggest piece of news last night that will have long term implications. From IMF, ‘IMF’s Executive Board Completes Review of SDR Basket, Includes Chinese Renminbi‘.
What this is going to mean:
- RMB becomes reserve currency; concurrently it takes away SDR share of other currencies as it takes its place in the basket.
- Sovereign funds will begin a great rotation/re-allocation of foreign reserves in favour of the RMB.
- Hypothetically, sovereign and supranational funds that hold foreign reserves according to the SDR basket allocation will have to buy RMB while selling holdings of USD, EUR, GBP and JPY until reserve holdings fit the IMF allocation.
- Countries that have greater trade dealings with China have more incentive to hold a larger share of foreign reserves in RMB.
- This will not happen overnight – ‘sufficient lead time‘ indicates from now until October 1, 2016.
The Executive Board of the International Monetary Fund (IMF) today completed the regular five-yearly review of the basket of currencies that make up the Special Drawing Right (SDR). A key focus of the Board review was whether the Chinese renminbi (RMB) met the existing criteria to be included in the basket. The Board today decided that the RMB met all existing criteria and, effective October 1, 2016 the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound. Launching the new SDR basket on October 1, 2016 will provide sufficient lead time for the Fund, its members and other SDR users to adjust to these changes.
- For traders, there is no immediate action but anticipate in the near future more brokers introducing CNY pairs for trading.
- For long term investors, expect a gradual strengthening in the RMB as sovereign funds buy RMB.
This is an event we have been anticipating – follow our stories Debutante Chinese Renminbi has a special date with year 2015 and Rising Renminbi moving towards reserve currency status. The other piece of news we expect will come soon enough – HKD abandons its LERS peg to the USD in favour of pegging to RMB and then ultimately its own redundancy/demise.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
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