There is a changing of the guard going on in currency leadership that not many people are watching nor commenting on. It is similar in nature to what is happening with the leadership in global growth and the drivers of the economy and it is why Anthony Bolton of Fidelity moved from the UK to Asia to set up his China fund.
We get it here in Australia because it has been so important in our current mining boom and so helpful in forestalling the worst ravages of the GFC. But while I watch the shenanigans and here the comments from the G8 meeting in particular and how Europe in general is handling Greece I get a sense that the current western leadership hasn’t made the cognitive leap. Certainly Europe’s paternal clinging to the IMF leadership position speaks volumes for this disconnect.
The importance of this changing of the guard was highlighted to me by The Prince who passed on a piece from ZeroHedge which looked at the Hong Kong Dollar market and the outlook for it and the CNY. The argument was that you should own HKD because its a heads you win tails you win also. Now the piece makes the good point that Hong Kong is one of the most flexible and sophisticated retail banking systems on the planet where currency and or gold conversion is easy. The locals are switching into the CNY deposit market to protect themselves against adverse moves in the USD.
I have a lot of sympathy for this view because I strongly believe above all other currency trades that the closest thing to a guaranteed trade in an inherently volatile asset class is that the CNY is going to appreciate against the USD and I think Europe as well. So the close sibling to the CNY, the HKD, I think is a similarly attractive bet.
This is a long term structural change and while I’m not calling the end of the USD as the reserve currency for the globe ultimately what people choose as a store of value is their choice and increasingly over the next decade or more it is likely that the CNY will march up the rankings.
I’ll follow up on what it means for the Aussie next week and how we might take advantage of it.