It has been nearly a decade since China and Russia fired the opening salvo in their tag team de-dollarization pursuit. In the early days of this anti-dollar crusade, there was little action, reminiscent of moving the king’s pawn to the center of the chessboard at the beginning of a match. However, since the fallout of Moscow's invasion of Ukraine, it has turned into a de-dollarization blitzkrieg that could usher in the "change" that Chinese President Xi Jinping and Russian President Vladimir Putin recently alluded to in front of cameras. The final week of March might have offered a glimpse into the future.
China's De-Dollarization Accelerates
In a 24-hour span, China settled its first liquefied natural gas (LNG) trade in the yuan and established a new agreement with Brazil to complete trade and transactions in yuan and reals. This was a huge step forward in ditching the greenback.
China National Offshore Oil Corp. (CNOOC), the nation's largest offshore oil and gas producer, and France's Total Energies finished a transaction that consisted of 65,000 tons of United Arab Emirates-sourced LNG. This comes as Xi has stated that he wants Beijing to utilize the Shanghai Petroleum and Natural Gas Exchange (SHPGX) to facilitate more significant volumes of yuan-denominated oil and gas transactions.
Rio De Janeiro and Brazil signed a March 29 agreement to wave goodbye to the buck and carry out trade directly in yuan for reals – and vice versa. Officials asserted that this was crucial to bolstering bilateral trade as China has been Brazil's largest trading partner since 2009.
This is a turning point for the US dollar. The greenback first rose to international prominence after the First World War, slowly displacing the British pound sterling as the chief reserve currency. It accelerated in 1944 following the Bretton Woods Agreement. Once former President Richard Nixon got the country off the gold standard, the greenback's representation in global markets exploded as more dollars were freshly printed and exported worldwide. The upcoming BRICS (Brazil, Russia, India, China, and South Africa) summit in August could be a critical powwow since leaders will likely carve out a new basket-reserve currency. Fascinating times, indeed!
Stocks Rally
In November, Liberty Nation reported that it would be the start of turning bullish on stocks, mainly because the Federal Reserve signaled that its quantitative tightening (QT) efforts reached their zenith. Despite the banking turmoil that tanked the leading benchmark indexes, the Eccles Building raised interest rates at the March Federal Open Market Committee (FOMC) meeting. The rate-setting Committee updated the Survey of Economic Projections (SEP) and indicated that one more hike was on the docket this year.
In other words, it is more than likely that the policy federal funds rate (FFR) would drop than increase. Investors ostensibly believe this, too, as the futures market is penciling in at least 75 basis points worth of rate cuts in response to slowing US economic conditions. This expectation has been a boon for the New York Stock Exchange so far this year. With the first quarter in the books, here is how the indexes performed from January to March:
Dow Jones Industrial Average: +0.4%
Nasdaq Composite Index: +16.77% (best quarterly performance since 2020)
S&P 500: +7.03%
Meanwhile, other assets that are typically sensitive to interest-rate movements because they will affect the opportunity cost of holding these non-yielding investments enjoyed a stellar or improved three-month span. Gold rallied more than 8% to touch $2,000 three separate times, silver wiped out its losses and turned positive (+0.23%) on the year, and Bitcoin spiked 71%. Ultimately, institutional investors and armchair traders are expecting the resuscitation of the easy money era.
Don't Be Crude
The first three months of 2023 were the best of times and the worst of times for crude oil. West Texas Intermediate (WTI) futures recorded a 9.39% gain for the week ending March 31, but they suffered a 5.21% monthly decline and a 5.97% year-to-date slump. The turbulent trends were also ubiquitous for Brent, the international benchmark for oil prices: 7.13% weekly gain, 7.06% March loss, and 7.05% quarterly slide.
Does this mean that the energy commodity’s fundamentals are shifting? Not necessarily. Oil is still sensitive to supply shocks, demand is strengthening, and domestic production has been flat this year and remains below pre-pandemic levels. The chief problem for oil has been the dreaded R-word.
Recession odds were already high heading into 2023, but the banking crisis involving Silicon Valley Bank, Signature Bank, and Silvergate Financial added to the probabilities. Even perma-bull – Goldman Sachs – increased the chances of a recession from 25% to 35%. Fears that the financial turmoil would result in tighter credit conditions impacted energy commodities, with WTI crashing under $67 on Mar. 17. But now that it appears that the situation has stabilized – for now – prices have soared, which could weigh on inflation levels in the coming months.
A recent Raymond James survey of Canadian oil and gas industry executives found that the average WTI price will be $85 per barrel over the next 12 months. "When we see such a difference between executive views and the strip, we infer that executives may be seeing supply limitations (i.e, inability to bring on more supply than what the financial market perceives [rigs, technical personnel, shareholder desire, etc.])," the report stated.
How much could this influence gasoline prices heading into the historically busy driving season? Unfortunately, the latest upward movement suggests wallets could feel the pecuniary agony this summer. According to the American Automobile Association (AAA), the national average for a gallon of gas topped $3.50 on April 1, up from $3.36 a month ago. But, sorry, motorists, here comes the pain.
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