The Unwind Tidal Wave

Why The Great Petrodollar Unwind Could Be $2.5 Trillion Larger Than Anyone Thinks

Tyler Durden on 08/29/2015

… In order to truly comprehend what’s going on here, one needs to look at China’s UST liquidation in the context of the epochal shift that began to unfold 10 months ago. When it became clear late last year that Saudi Arabia was determined to use crude prices to bankrupt US shale producers and secure other “ancillary diplomatic benefits” (think leverage over Russia), it ushered in a new era for producing nations. Suddenly, the flow of petrodollars (flowing out from Saudi Arabia and other oil producing nations) began to dry up as (oil) prices plummeted. These were dollars that for years had been recycled into USD assets in a virtuous loop for everyone involved. …

As commodity currencies plunged (and drove up the dollar), the yuan’s dollar peg meant China’s export-driven economy was becoming less and less competitive. Cue the (juan) devaluation and subsequent FX market interventions. …

Beijing has joined the global USD asset liquidation party which was already gathering pace thanks to the unwind of the petrodollar system. … And further, here’s why the scope of the unwind could be materially underestimated (because everybody is calculating national FX reserves only). …

a substantial part of … oil proceeds has previously been placed in sovereign wealth funds (SWFs), which are not reported as FX reserves (with the notable exception of Russia, where they are counted as FX reserves).

  • Currently, oil exporting countries hold about $1.7trn of official reserves but as much as $4.3trn in SWF assets.

Now that the tide has turned, it is likely that not only official reserves drop but that SWF asset accumulation slows to nil or even reverses. … between China’s FX reserve drawdowns in defense of the yuan (and other follow-on Asian currency devaluations) and the dramatic decrease in petrodollar flow, the self-feeding loop that’s sustained the dollar and propped up USD assets is now definitively broken and we are only beginning to understand the consequences.

(Read more with charts.)


About icliks

Biding my time in central ms ... yours too, if ur reading this.
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