Credit Suisse’s Pozsar says commodities crisis could weaken Eurodollar, boost yuan

China’s central bank is uniquely placed to backstop a global commodities crisis sparked by sanctions imposed in response to Russia’s invasion of Ukraine, potentially paving the way for a much stronger yuan, a Credit Suisse investment strategist said.

In a note published on Monday, Zoltan Pozsar, global head of the bank’s short-term interest rate strategy, said the unfolding crisis in Ukraine had led to a “perfect storm” in commodities that could weaken the Eurodollar system, contribute to inflation in Western economies and threaten financial stability.

“This crisis is not like anything we have seen since President Nixon took the U.S. dollar off gold in 1971 – the end of the era of commodity-based money,” said Pozsar. “When this crisis (and war) is over, the U.S. dollar should be much weaker and … the renminbi much stronger, backed by a basket of commodities.”

Russia’s invasion, the biggest attack on a European state since World War Two, has created 1.7 million refugees, fears of wider conflict in the West and led to a raft of sanctions on Moscow.

The conflict has driven surges in global commodity prices, pushing nickel prices to a record high and oil to a 14-year peak. Russia has warned a ban on Russian oil imports could jolt the cost of a barrel to $300.

“Russian commodities today are like subprime (collateralised debt obligations) were in 2008. Conversely, non-Russian commodities are like U.S. Treasury securities were back in 2008. One collapsing in price, and the other one surging in price, with margin calls on both regardless of which side you are on,” Pozsar said.

Western central banks, held back by sanctions imposed by their own governments, will not be able to provide support such as emergency liquidity needed to close market gaps, he said, adding that the People’s Bank of China (PBOC) faced no such restrictions.

Pozsar said selling U.S. Treasuries to fund vessel leasing and purchases of cheap Russian commodities would help the PBOC control inflation in China, while leading to commodity shortages, recession, and higher yields in Western economies.

Alternatively, the PBOC could print yuan to buy Russian commodities.

“That’s the birth of the Eurorenminbi market and China’s first real step to break the hegemony of the Eurodollar market. That is also inflationary for the West and means less demand for long-term Treasuries,” Pozsar said.

Russia calls the campaign it launched on Feb. 24 a “special military operation”, saying it has no plans to occupy Ukraine.

(Reporting by Andrew Galbraith; editing by Jane Wardell)

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