Last week, Russian and China signed a natural gas agreement. According to the agreement, Russia will be exporting natural gas to China over the next 30 years. After the agreement, President Vladimir Putin held a speech at the conference arranged by the CNBC. During the speech he outlined Russia's plans to tighten the cooperation with China. He also mentioned the possibility of creation a Eurasian union.
What do Russia-China relations mean to the US Dollar?
Last week, Gazprom signed a 30-year NG agreement with China. The agreement is estimated at $400bn. The agreement came as the concussion of 10-year-long talks between Russia and China. Apparently, the agrement looks fairly promising to Russia amid Europe's intension to reduce its dependency on Russian energy carriers. It should be noted that at this point, the Eu is the biggest consumer of Russian oil and natural gas.
More and more experts assume that the recent agreement between Russia and China is another step to tighter cooperation, which may eventually undermine the status of the US Dollar as the global reserve currency. Despite the fact, that the details of the agreement are kept secret, some experts assume that the implementation of the ambitious plan will involve currency swaps (which will mean the two neighbors will abandon the US Dollar while settling accounts within the scope of this NG agreement). In other words, the Russian Ruble will be converted into the Renminbi (the Chinese Yuan) and back. At this point, the US Dollar is the only official currency used as a means of payment in oil and natural gas trading.
At the same time, VTB, Russia's second biggest bank, signed a currency swap with the People's Bank of China. At the same time, Premier Dmitry Medvedev made a speech to let the West know that all those sanctions imposed by the EU and the USA will lead to a stronger Russian Ruble as a regional reserve currency.
Apparently, such a big-scale currency swap between Russia and China will question the US Dollar as the world's major reserve currency. Other experts are also concerned about the fate of the US Dollar due to future consequences of the Fed's quantitative easing. Such currency swaps may result in major consequences in financial markets, triggering market crashes all around the globe.
By the way, China's is the biggest holder of the US debt (represented by Treasury bonds). The total holdings are estimated at $3800bn. At the same time, China is currently the biggest consumer o gold in the entire world. Apparently, China is trying to diversify its portfolio and to reduce its exposure to the US Dollar.
Some experts believe that the recent strength of the common currency against its American counterpart was caused by China's gold purchases. China is hedging its dollar positions with gold and euro.
USD: Mid-Term Prospects
According to the comprehensive analysis of the USD index (USD against a basket of 6 other majors) conducted by Masterforex-V Academy, the H4 chart of the USD index indicates a rally, which means the American currency is strengthening against its major counterparts. By the way, the common currency represents 57,6% of the index. That is why EURUSD and the USD index move together (they have negative correlation)
The mid-term rally started at 78,91 and continued up to the 80,43 high set on Monday, May 26th. Still, this rally is a bullish reaction to a bigger-scale downtrend.
Today, the index is slowing down the rally and is trying to consolidate at the other side of the MF sloping channel. If the price succeeds n doing so, we may well see the end of the recovery and the continuation of the recent bigger-scale downtrend.
The bias is bearish until the price stays below the sloping line of the MF sloping channel (marked red in the chart below). The closest levels of support are 80,16 and 80,05. A break below these levels will give way to 79,88 and may even question a further rally.
Alternatively, if the price goes back above the sloping channel, we are likely to see an upswing to 80,48 or even higher. A break above the level will signify strength and may give way to 80,60. And above.
