Forget Iran — Focus on China’s Digital Yuan Instead

Monday, 20 January 2020
Melbourne, Australia
By Lachlann Tierney

  • Markets
  • ‘We are not seeking full control’
  • It starts with Europe…
  • About Project Stella…
  • US to take longer switching to a CBDC
  • Blue Sky

In case you missed it, the US recently took out a very important Iranian military leader in Iraq.

As soon as markets opened in the US, the S&P 500 shed almost 1% on the news.

But with the world’s attention firmly focused on events in the Middle East, now is the time to start thinking about what will be driving markets in 2020.

Anyway, this is THE story of the year in my book…

China to launch a digital yuan — setting off a chain reaction in the global financial system that will go on for decades.

Don’t get me wrong, this is a rigged system that has bled money out of the Average Joe’s wallet since the early 70s.

But I am convinced that in the coming months mainstream outlets will pick this story up.

And you won’t hear the end of it.

I also suspect that it will receive some attention from Trump on the campaign trail in the final months of the 2020 election cycle.

This is because the digital yuan could prove to be a threat to US financial hegemony.

Why else would they do it?

It’s not benevolence that is driving this move, that’s for sure.

No, I think it is a stony-faced determination to remake the financial order.

Markets

Over the weekend, the Dow Jones Industrial Average closed up 50.46 points, or 0.17%.

The S&P 500 closed up 12.81 points, or 0.39%.

In Europe, the Euro Stoxx 50 index was up 34.12 points, or 0.90%. Meanwhile, the FTSE 100 gained 0.85%, and Germany’s DAX closed up 96.70 points, or 0.72%.

In Asian markets Japan’s Nikkei 225 is up 57.04 points, or 0.24%. China’s CSI 300 is up 0.52%.

The S&P/ASX 200 is up 15.6 points, or 0.22%.

West Texas Intermediate crude oil is US$59.14 per barrel. Brent crude is US$65.63 per barrel.

Turning to gold, the yellow metal is trading for US$1,559.30 (AU$2,265.35) per troy ounce. Silver is US$18.11 (AU$26.31) per troy ounce.

One bitcoin is worth US$8,634.39.

The Aussie dollar is worth 69 US cents.

‘We are not seeking full control’

The man behind China’s digital currency push is Changchun Mu, who heads up the PBOC’s Digital Currency Research Institute.

This is what he said about the digital yuan in November 2019:

We know the demand from the general public is to keep anonymity by using paper money and coins … we will give those people who demand it anonymity in their transactions.’

But at the same time we will keep the balance between the ‘controllable anonymity’ and anti-money laundering, CTF (counter-terrorist financing), and also tax issues, online gambling and any electronic criminal activities.

This is the most eerie part of his comments though (emphasis added):

That is a balance we have to keep, and that is our goal. We are not seeking full control of the information of the general public.

Fingers crossed behind his back, I would think.

Dissidents are being ‘re-educated’, Hong Kong will remain free, and pigs are avians, we know.

This is the new age of Orwellian doublespeak we are now in.

China’s digital yuan to be anonymous like cash? Yeah right!

But how will it all play out?

It starts with Europe…

I think Europe will look at the digital yuan with envy.

The ECB has followed Japan into a negative rate Bizarro World.

This leaves it with very little room to manoeuvre, and it may look for a pressure release valve.

Technology is one way to manipulate the money supply.

The ECB’s Christine Lagarde has indicated a willingness to at least consider Eurozone-wide, central bank backed digital currency (CBDC).

This is an exercise in strategic public relations.

Behind closed doors the ECB is likely working very quickly through their options.

It is then no surprise that the ECB has teamed up with the Bank of Japan (BOJ) on something called Project Stella.

About Project Stella…

There was limited fanfare when Project Stella’s Phase 3 report was released in June of last year.

The report stressed that ‘legal and regulatory aspects are outside the scope of the project,’ and that the project was ‘not geared towards replacing or complementing existing arrangements, which include central bank-operated payment systems.

Everyone seems to be walking on eggshells here.

Having spent some time with the report, it makes for dense reading to be sure.

But here is the main takeaway — central banks are looking seriously at cross-border payments, specifically those involving something called an RTGS system.

RTGS stands for real-time gross settlement.

An RTGS system is like the central bank’s ‘book’ of transactions — typically used for large-value interbank transfers.

The advantage of these is that they do things in real time, as opposed to bundling up credits and debits and settling things at the end of the day.

This means a smaller window in which a bad actor can interfere with the transfer.

The most important of these systems is the US Fedwire system which was launched in 1970.

RTGS systems are the glue that keeps the trust in central banks together.

And if China launches a digital yuan, and then Europe or Japan follows suit (maybe in 2021), then what next?

US to take longer switching to a CBDC

I think the US will take far longer to come to the party than either China or the ECB.

This is because their economy is still relatively strong, and they still have some wiggle room on interest rates.

Also, oil still changes hands in US dollars.

However, once China opens Pandora’s Box by launching a digital yuan, things could get messy for central bankers quite quickly.

In an unbundled world, who do you trust more?

An old-fashioned RTGS system or some souped-up Chinese platform?

I think this will usher in a new phase of techno-monetary competition which will be immensely complex.

I even suspect that you may hear a new buzzword in the political world — ‘fake money’.

2020 will be chaos — stick with Port Phillip Publishing to help you navigate it.

Regards,
Lachlann Tierney


Blue Sky

 

[Equity markets are now in blue sky without any technical resistance above the market. Click on the picture to find out what needs to happen before Murray will become bearish again.]

The headlines that pronounce the market has hit a new all-time high are starting to wear a little thin. The S&P 500 in particular is trending higher in a straight line creating new all-time highs with each passing day.

Markets are either trending or range-bound, but it can be difficult to know the moment when the switch occurs from one to the other.

My own way for dealing with this problem is to have clear definitions that take the decision-making away from me.

It’s too hard to explain it to you using text. It’s much easier for me to show you exactly what I mean on my charts, which is why I do these weekly videos in the first place.

So if you want to see how I define a range, click on the video above to watch the short presentation.

Using my definition of ranges, the S&P 500 has confirmed that it’s no longer stuck in the range of the past two years and is now in blue sky.

With the US Fed buying $60 billion of T-Bills every month, I can’t see any reason for this rally to stop until the Fed wakes up and realises that they are stoking the rally and need to take away the punch bowl.

How long it takes for that to happen is anyone’s guess, but we may witness a strong blow-off rally in the meantime.

The Alpha Wave Trader portfolio is now 100% long and I have a few stocks in the wings that I’m about to jump into.

It’s always tough chasing a market higher and you need to stay on your toes when you do. But the current rally may surprise to the upside, so I want to make hay while the sun shines.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader