SDR composition

JulieW · Mar 14, 2015

THE REAL REASON THE SWISS PEG ENDED
it says. Not sure what is feasible in this article, but the gist is there.

In all categories the following seven currencies dominate the top positions:

1. USD United States dollar
2. EUR European Union euro
3. YEN Japanese yen
4. GBP Great Britain pound
5. CHF Swiss franc
6. CAD Canadian dollar
7. RMB Chinese yuan

The top 4 make up the current composition of the SDR. With all the hype surrounding the RMB, and its internationalization for inclusion into the Special Drawing Right, the remaining 2 currencies have somewhat been forgotten.

In order for the Swiss franc to be considered for the SDR, which it would have to be based on the above metrics and conditions, it had to end the peg to the euro and free float like the ones above. This also means the RMB will end its managed peg to the USD in the coming months and become more market oriented before being added to the basket.

The legitimacy of the basket, and the SDR's ability to stabilize both global liquidity and the new exchange rate regime, will require all 7 currencies listed above to be included.

The IMF has also expanded and improved the data reporting which is expected from its member countries. This is a vital component of the transition to a multilateral financial system structured around the SDR.

In a report presented to the G20 Finance Ministers and Central Bank Governors on September 11, 2014, the International Monetary Fund, the Bank for International Settlements, and the Financial Stability Board, reviewed, and dictated, the terms of improving the data gaps on foreign currency exposures.

This reduction in foreign currency risk is directly tied to the coming discussions around adjustments to the SDR basket, and the Sovereign Debt Restructuring Mechanism. The SDRM will address the growing sovereign debt crisis and allow for a re-allocation of SDR instruments under the Designation Mechanism.

The DM will be used in situations where the capacity in voluntary trading arrangements becomes insufficient. Member countries of the IMF who have strong external positions, being loaner nations, can purchase SDR's with freely usable currencies, from members with week external positions, being borrower nations.

The use of substitution accounts will ensure that no exchange rate losses are incurred during the process. When we consider the large amount of USD in the foreign reserve accounts around the world, a sovereign debt which the US owes to China, among others, the use of a DM and SDRM methodology will only work if the above 7 currencies are included into the SDR composition to create the necessary stability and legitimacy.

The IMF has been developing the expectation amongst member countries that data reporting has to be improved. This week Canada was informed that it needed to improve data reporting and take further measures to address its overvalued home market. Back in January, Christine Lagarde traveled to China to discuss improvements to that countries data reporting.

A part of the report from the IMF, BIS, and FSB, stipulates that the availability of "appropriate high quality interest rate instruments" are to be maintained and developed. Proper data reporting will ensure "domestic assets exist with a well-defined interest rate", which in turn will help reduce foreign currency exposures.

The report, which can be read here, was signed by the following:

IMF Representative Christine lagarde
BIS Representative Jaime Caruana
FSB Representative Mark Carney

The progression towards the multilateral financial system is picking up momentum. With the announcement of the forthcoming Chinese payment system, CIPS, which we had previously covered here, and here, it is becoming increasingly challenging to deny the obvious truth in front of us.

The SDR seven will form the new basket composition, and perhaps, just perhaps, that is what Ms. Lagarde was attempting to communicate all along. Her reference to the "magic 7" is extremely similar to the term "magic circle" which was used in another official publication last year, when it was mentioned that the RMB would gain entry in the SDR magic circle. This was reviewed in the post The SDR Magic Circle. Here is a quote from the publication:

Chinese entry into the 'magic circle' of reserve currencies in the SDR, along with the other components (the dollar, euro, yen and sterling), has already been advanced by a ground-breaking decision announced this month by the UK Treasury. The British government will issue renminbi-denominated bonds, the first sovereign government to take such a step (apart from the Canadian province of British Columbia), and allow the proceeds to be held in the UK reserves managed by the Bank of England, breaking two long-held taboos for the UK authorities.

From this statement we can assume that the "other components" referenced are the other currencies which make up the magic 7, as presented above, and not just the 4 which were listed.

Those who still deny the reality of this multilateral transition to the international financial system are increasingly running out of logical and rational arguments. It is happening whether we agree with it or not. And the end of the Swiss franc peg is only the first of many market rattling events.

That just leaves gold. Here at POM we have considered two possibilities. One, gold is included directly into the basket at a specific percentage of the overall valuation. Second, gold could be used to partially support the 7 core SDR currencies, which would indirectly help bring stability to the asset.

Either way, big wheels are in motion. Recently Alasdair Macleod wrote a piece titled The New London Gold Fix and China. In it he explained how the four London fixing banks will be handing control over to the International Commodity Exchange on March 20, 2015. This means that the London gold market will become partially regulated. It also gives China the opportunity to dominate the gold market.

Taken in the context of our discussion, China would want to secure the gold market, or at least prevent manipulation of the gold market, before it ends the peg with the USD and partially supports the RMB with gold reserves. This supports our argument above that gold will not be directly included in the SDR composition.

And with all of that will come the announcement from China on their official gold reserves. These reserves will be used to both support the yuan and bring stability to the international financial system. A financial system which will still include the USD.
http://philosophyofmetrics.com/2015/03/11/the-real-reason-the-swiss-peg-ended/
Click to expand...

tolly_67 · Mar 14, 2015

The IMF had no idea that the Swiss were going to break the peg and they were not told because the Swiss knew that they would inform the very banks that control the IMF who would in turn front run the decision and profit to the tune of billion of dollars at the expense of the Swiss.
The swiss knew the Euro is a dead currency and cut it loose as it was costing so much to maintain the peg. It has nothing to do with SDR.

Pirocco · Mar 18, 2015

The fixed Swiss Franc - Euro exchange rate (peg) was decided (in 2011) to stop speculation on the Swiss Franc, that drove its price (in other currencies) "too much".
Then, earlier 2014, the ECB considered the euro too expensive, and started to drive it down, so low that the Swiss decided to end the fixed exchange rate. For the same reason as the speculators case earlier.
The first decision caused a steep fall of the Swiss Franc, the last decision caused a steep rise (the frontrunners club jumped ofc on it). But since, that steep rise was sold away again, and its price is now back to what it was before.
http://finviz.com/futures_charts.ashx?t=6S&p=w1
Of course, the gold selling club likes to spin the story abit, to increase sales figures I guess. "That just leaves gold" haha.

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SDR composition

JulieW Well-Known Member Silver Stacker

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