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What Does China’s Inclusion in the SDR Basket Mean for the Markets?

What Does China’s Inclusion in the SDR Basket Mean for the Markets?

John Kicklighter,

Talking Points:

• The IMF announced it had approved the Chinese Yuan's inclusion into its SDR basket - making it a 'reserve'

• While the actual basket adjustment will take place next September, the symbolic implications are clear

• A brief CNH rally is not the extent of this news, the implications will be long-term and deeply rooted

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A portion of the trading rank was disappointed by the market's response to news that the IMF had approved the Chinese Yuan's inclusion into its SDR basket. For those with a short-term view on the market, the nod to China was seen as a fast track to the 'reserve' currency designation and thereby a trading authority and interest tantamount to the Dollar or Euro. However, that is not the route this development takes. The implications are deeper, more complex and ultimately far more market-moving than just a short-term bout of volatility. Where the Chinese currency takes a 10.9 percent place in the SDR basket, the Yen and Pound are seen as less representative of global liquidity while the Euro sacrifices the majority of China's gain. Long-term haven implications, expectations of China hastening its financial opening and an inevitable diversion of capital from other financial hubs to Shanghai carry important long-term considerations for Global Macro-minded investors (which FX traders are inherently). We discuss this important change in today's Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.