Small Exchange: China and Scotland bringing change, USD set to sag

Andrew Munro 26 June 2017

money

This week's currency news rounded up.

China becomes the first to test a national cryptocurrency

China's central bank has revealed a new prototype currency, making waves as the first national cryptocurrency. It's already being tested and might be abruptly released as a counterpart to China's renmibi in the near future. It is likely that other countries will follow suit eventually. Crypocurrency blockchain security, accessibility and ease of trading can all be a major boon in specific ways.

Large and diffuse populations, corruption issues and a lack of financial system engagement by citizens are all signs that a county might find national cryptocurrencies to be especially beneficial. China is the first to take concrete steps, while Russia has unsurprisingly announced that it's time to consider it. Japan, meanwhile, is taking large steps to start using cryptocurrencies as equivalents to legal tender, with over 260,000 stores soon to accept it.

USD lags behind

The USD is lagging behind the AUD, Euro, JPY, GBP, and might continue to do so for a time as expectations fade for another 2017 US rate hike. It's not all bad news however, with low inflation and other metrics drawing longer-term investors to help smooth the curve.

It's not all good news either though. Other currencies are tracking in similar ways, but might also find more room to grow in the second half of 2017. In the words of IG Securities FX strategists, US yields are "stuck at low altitudes." It's might be as safe as ever, but investors may still want to cast a wider net and consider more options.

A roadmap for Scotland's independent foreign reserves

It's often been said that the problems of making an independent currency will stop Scotland from seeking post-Brexit independence, but a new report says the exact opposite in very concrete terms.

It lays out a roadmap for $40b of independent Scottish reserves (a safe 20% of GDP, approximately) based on:

  • $16.2b from a reasonable division of UK foreign exchange reserves, under debt and asset negotiation
  • £4.46b of hard Sterling circulating in Scotland
  • $13b from a mutually beneficial foreign exchange swap with the Bank of England
  • €8.8b raised through a Euro bond

The annual cost of servicing the debt involved in this plan is pegged at a remarkably affordable £70.2m per year, compared to the £500m per year that Scotland currently contributes to the UK's foreign reserves. Feasibility problems remain however, including issues with the new currency's stability, a perhaps too-optimistic 20% of GDP baseline and any currency changes that would result from actually enacting the plan.

Despite making a lot of assumptions, it still paints a remarkably affordable picture. It's early days yet, but an independent Scotland, and new currency, could be in Europe's future.

Each week Small Exchange sums up currency news from around the globe and looks into how it impacts exchange rates and options.

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