Stronger Dollar Indicates Biden Win but Ray Dalio is Right that RMB to Become Reserve Currency

greg beier macroESG.com monday 02 november 2020 06:37 PM ET

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Markets, Politics, and Technology for a Sustainable Future

Actionable Ideas

• Buy dollars on dips with tight stops if Mr. Biden is on track to win the election.

• Sell dollars on rallies with tight stops if Mr. Trump is on track to win the election.

• Buy RMB and Chinese government debt - only invest what you can afford to lose as the entire investment could get locked up in unexpected military and diplomatic machinations.

Bullish Contrarian Dollar View

Macro ESG called on October 12th in Goldman’s US Dollar View is Wrong on Biden Win and Vaccine for the US dollar to appreciate and disagreed squarely with Goldman’s call for the US dollar to decline.

The dollar is going up because the currency markets believe that Joe Biden is going to win and bring the country back together, which would be bullish for USD.

Ever wondered if Macro Social scores impact currency values? Of course they do.

It was the protests surrounding the death of George Floyd that sank the dollar over the summer. In fact, it was also the Macro G scores that helped to drive the US dollar lower, given the Trump Administration’s response to stoke social strife for political advantage so he could sell the need for “law and order” to the public. He even called out the active duty army on to the streets, which was promptly rejected by the Chairman of the Joint Chiefs at the Pentagon. 

Another noted currency strategist, David Bloom, expressed on Bloomberg that it doesn’t matter who wins the election for the USD – the market just wants the election closed. With all due respect to Mr. Bloom, he is completely wrong as Biden and Trump represent two fundamentally different visions of America.  

Mr. Biden is committed to bringing Americans together and ending racial strife, while Mr. Trump is committed to sowing division and leading a narrow, loyal base. 

Ray Dalio Likes RMB for Reserve Currency

Now, Ray Dalio was on Bloomberg yesterday calling for the RMB to become a reserve currency at some point (not right away but faster than we would expect) and I agree with his view.

[youtube=://www.youtube.com/watch?v=Wqjxyk4GMts&w=854&h=480]

As Macro ESG called on August 26th in China Builds Investment Alliances with Oil Suppliers via Rising RMB + Equities as US Squabbles that China would start to convert the RMB to reserve currency status by recycling its crude oil spend into petro-yuan, much like what the US did with petrodollars.

This forecast for the RMB’s path to reserve status that Macro ESG has outlined seems solid as it makes sense and I believe makes the case for how China is putting together it’s currency anchor investors.

Negative Real Rates Good for RMB 

With the world is awash in negative rates, as detailed in an Op-ed by Gita Gopinath, Chief Economist of the IMF, in today’s Financial Times:

“For the first time, in 60 per cent of the global economy — including 97 per cent of advanced economies — central banks have pushed policy interest rates below 1 per cent. In one-fifth of the world, they are negative.”

Clearly, with the advanced economies stuck in a liquidity trap, this is an ideal time for China to make its move for the RMB to become a reserve currency as they can at least offer yield. And, as China is the number one trading partner with its oil suppliers, China is in a strong position to offer collateral to its RMB buyers who get yield and traded goods if the deal goes awry – it’s a savvy proposition.

A Two-Tiered Financial System 

Once China has a dedicated group of habitual RMB holders, it will slowly expand out from there, which will fundamentally not work as institutional investors in advanced economies will be limited from investing in a nation without meaningful investor protections.

Hence, starting a two-tiered financial system.

Investment Implications

• The dollar could easily strengthen in the broad multi-lateral world of President Biden.  

• Now, the question is - what to do about the negative real yields? America has never done this before.