Dollar-Selloff Intensifies as China Launches Petro Yuan
The world’s biggest energy importer launched its yuan-denominated oil futures contract on Monday – a move that some say could sound the spell the end of the petro-dollar and hasten the decline of America’s global dominance.
China Launches Petro Yuan
On Monday, the Shanghai International Energy Exchange launched the first ever yuan-denominated crude futures contract, the first mainland derivatives product open to overseas investors. The listed futures are contracts to be delivered between September and March 2019. The initial benchmark prices of 15 contacts were originally listed at 416 yuan ($65.7 U.S. dollars).
Seven medium sour crude products will be deliverable via the new contracts, including the home-produced Shengli. According to the South China Morning Post, roughly 18,540 lots were purchased on the first day of trading.
The long-awaited arrival of the so-called petro yuan is “the single biggest change in capital markets, maybe of all time,” according to Hayden Briscoe, who heads fixed income investment at UBS Asset Management.
China overtook the United States in 2017 as the world’s biggest energy importer. The arrival of the RMB oil futures means some of the world’s oil supply will be priced in yuan, thereby threatening the dominance of the petro dollar. The new futures contract is essentially the first opportunity foreign investors have for accessing mainland China’s commodity market.
Oil imports to the world’s second-largest economy surged 20% year-on-year in January, reaching a new record of 40.64 million tons, or 9.57 million barrels per day.
Dollar Sinks to Five-Week Lows
The U.S. dollar index (DXY) fell 0.5% on Monday to 89.03, its lowest since mid-February. DXY has now fallen in three of the last four sessions and is off about 1.5% from the Mar. 20 high of 90.37.
With the fall, DXY is back below the 50-day simple moving average – a level it has struggled to overcome since last May’a death cross formation.
The greenback has struggled all year long due to mixed economic cues and a stronger basket of competitor currencies as central banks around the world get ready to tighten monetary policy. 2017 marked the dollar’s first yearly decline in five years, a trend that intensified through the first quarter of 2018.
Down 3.3% since the start of the year, there’s reason to believe the dollar will continue on its downward spiral as the Federal Reserve tries to balance inflation expectations, record household debt and two-speed economy. Currencies around the world are also strengthening as central banks move to raise interest rates and cut bond purchases following years of record stimulus.
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