Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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OPEC+ and Chindia walk out of the IMF, agree to trade with new reserve asset
Redmond Wong
Chief China Strategist
Summary: Recognising the ongoing weaponisation of the USD by the US government, non-US allied countries move to leave the USD and the IMF to create an international clearing union (ICU) and a new reserve asset, the Bancor (currency code KEY), using Keynes’ original idea from the pre-Bretton Woods days to thumb its nose at the practices of the US in leveraging its power over the international monetary system.
While less than a fifth of international trade is destined for the US, over a third of international trade is invoiced in USD and nearly 60 percent of global foreign exchange reserves are USD. The ban on transactions with Russian sovereign entities in February 2022 after Russia’s invasion of Ukraine sent shockwaves across countries not allied militarily with the US as the magnitude of the ban far exceeded sanctions on Iran, Venezuela and other countries in recent decades. These countries wonder whether their US assets—and even EUR, JPY and GBP assets—could be subjected to freeze orders imposed by the US Treasury and other US allies overnight.
Many have speculated that the Chinese renminbi might become the new reserve currency, but China has shown no interest in abandoning cross-border capital controls. Another important aspect hampering the use of CNH in trade is that many non-US allies are wary of China’s rise in influence and power.
Rather, a natural solution for China and its many trading partners, particularly energy and other commodities exporters, would be to find a new non-national currency reserve asset upon which to trade. They find inspiration in British economist John Maynard Keynes’ playbook for reconstructing a post-World War II international monetary system without a hegemon. In an epochal conference convened in Astana, Kazakhstan, leaders from OPEC+ countries, mainland China, Hong Kong, India, Brazil, Pakistan, Central Asia countries, and tens of African Union countries gather to establish an ICU based on a new accounting unit and reserve asset: the Bancor (currency code KEY). The KEY can only be held by member central banks and is used as an accounting unit to settle international trades and as a reserve asset. The new KEY is indexed to a basket of traded commodities with crude oil having the largest weight. The currencies of member countries are backed by the KEY at fixed exchange rates and are adjusted according to relative current account shifts among member countries. All the ICU member countries of the newly created monetary union withdraw from the IMF. Saudi Arabia and Hong Kong end their currency pegs to the USD.
Market impact: Non-aligned central banks vastly cut their USD reserves, US Treasury yields soar and the USD falls 25 percent versus a basket of currencies trading with the new KEY asset.Latest Market Insights
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