Time to get back to the SDR theme. 2015 is anticpated to be a year of major change for the composition, convertability and use of the SDR.
When Managing Director of the International Monetary Fund Christine Lagarde gave the speech last year where she mentioned the number 7 numerous times, the internet caught fire with theories and analysis of what exactly was meant by the term “magic seven”. Contrary to popular opinion, it had very little to do with the occult, and more to do with the forthcoming composition changes to the SDR valuation.
The move away from the USD as the primary reserve currency used in the global financial system will be the largest change and transition in how the world functions in most of our lifetimes. The balance of payments system which supports the United States dollar is stricken with imbalances, as presented in the Triffin Paradox.
For the SDR to gain legitimacy as a global unit of account, the composition of the basket has to be expanded to include a more balanced representation from the largest economies. It is debatable whether China is now the largest economy on Earth, or the second largest, but either way the inclusion of the Chinese currency, RMB, in the SDR composition later this year is widely accepted as inevitable.
There are two possible meetings where this might get publically discussed/announced. The World Bank Spring Meeting from April 17-19 in Washington, DC or the World Bank Annual Meeting from October 9-11 in Lima, Peru.
The RMB is the seventh most traded currency in the world. So we can expect that if the SDR is going to include the Chinese currency, all which come before it will also be added to the basket as well.
There are a few metrics and standards which we can reference to define the top seven currencies in the world. For our purposes here, we will use the data of the Bank for International Settlements, as measured and segmented into the following categories:
• International Debt Securities – Currency Composition
• Global Foreign Exchange Market Turnover – Currency Composition
• Global Foreign Exchange Derivatives Market Turnover – Currency Composition
• Exports and Financial Inflows – Exporters
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.
The article below is worth a read, if you are a SDR junkee. I only wish I knew what the SDR changes meant for me, as an individual. Maybe nothing or will it be some inflation (declining $Cdn) or more deflation (rising demand for $Cdn)?