1. China's new RMB oil futures exchange - the 'story of the year'!

Watch for the opening of The Shanghai International Energy Exchange - acronym: INE - this quarter. 

'Story of the year' and 'game changer' are what Bob Savage, CEO of TRACK and member of our soon-to-be launched China Analyst Network, calls the INE. And, the impact goes way beyond oil to bolstering the RMB's challenge to the dollar.

About the INE. The INE will offer the first oil futures contract denominated in RMB, instead of U.S. dollars.

• Chinese buyers will lock in oil prices and pay in RMB, instead of U.S. dollars.
• Oil producers will be able to sell oil to China - the largest oil importer - in RMB, instead of dollars.
• And, the INE will establish a third oil price benchmark (after the WTI and Brent) in RMB, instead of U.S. dollars.
• (note: the 'RMB, instead of U.S. dollars' - that's crux of what follows.)

The INE sounds a little ho-hum until Bob explains its impact on the relationship of commodities and currency: 

• The last time the world saw a reserve currency change was during World War Two when the dollar formally replaced the British pound as the universal medium of global exchange in the 1944 Bretton Woods Agreement.
• But the de facto change began 'after World War One, when more and more contracts started to be denominated in dollars instead of pounds. And, that played a part in the dollar's replacing the pound as the world's reserve currency.' 
• 'The question to ask is: Will the U.S. begin to see an erosion of its reserve currency status when more and more contracts start to be denominated in RMB?' 

'Already, the open interest of the commodity contracts listed in Shanghai in Renminbi far outstrips anything in the rest of the world's commodities futures in commodities combined.' 

• 'What we're beginning to recognize is what has de facto already been the truth: that China's import of a huge proportion of the world's commodities changes the way currencies work.'

'As more trade becomes denominated in Renminbi and more futures contracts become denominated in Renminbi, then the Renminbi becomes a more viable alternative to the dollar, and prices begin to revolve around whether the Renminbi, not the dollar, is holding its value or not.'

Enter the INE. 'The denomination of oil futures contracts in Renminbi exemplifies the role of commodities in the geopolitical fears about the dollar weakness and about the role of China in that weakness.'

• This is why the opening of the INE could 'exacerbate the dollar weakness story because it's an example of the dollar continuing down the path of eroding its reserve status.'

After the INE opens, watch:

• 'How much volume it does and how quickly it expands.'
• 'How many other countries start denominating oil contracts with China in Renminbi. The Saudis have said they might. The Iranians already do. The Russians already do. But, if OPEC, as a whole, starts to denominate both in dollars and Renminbi, it's a game-changer.'

'For all these reasons, the opening of the Shanghai International Energy Exchange, the INE, could be the biggest story of the year.'

• 'The impact might not happen dramatically or immediately, but over time, over maybe the next five years, the opening of the INE could be seen as crossing the Rubicon.' 

2. U.S. inflation in an RMB world

Bob Savage, CEO of TRACK, riffed on U.S. inflation if we one day lived in an RMB world.

If the RMB moves toward replacing the dollar, then 'the locus of attention about inflation, particularly global inflation, will change from 'what is the policy of the Fed?' to 'what is the policy of the People's Bank of China?' - and, to what is the value of the Renminbi rather than what is the value of the dollar.'

• 'It really moves U.S. inflation from being under Fed control. 
• Instead, 'you have to keep an eye on Chinese demand for commodities. That will set the rates for a lot of commodities that we're dependent upon.'
• 'And, if Chinese demand sets the rates, the currency relationship with China will likewise matter to the U.S. in a much more dramatic way.'

'If China sets the commodities rates, U.S. inflation from imports will be more dramatic.

• 'Up until now, import inflation in the U.S. has been muted because we are blessed with lots of commodities of our own. And, the pricing of those commodities on a world market has never really been part of the story because everything that we buy and sell has been denominated in dollars.'
• 'But, if we start pricing those commodities in RMB terms, then that exchange rate becomes terribly important to the Fed.'