China’s “War on the Dollar” Is Almost Won

Stocks advanced this morning as the market continued chopping sideways. The Dow, S&P, and Nasdaq Composite all gained on better-than-expected corporate earnings as well as eased China Covid fears.

Best Buy (NYSE: BBY) shares popped over 12% in response to strong forward guidance. The retailer raised its 2023 fiscal outlook after beating analyst estimates in Q3. That’s about as good as it gets for Best Buy considering how dire the situation has been for other specialty retailers.

Dollar Tree (NASDAQ: DLTR), for example, sunk 9% after reporting a rough quarter and worse guidance. Zoom (NASDAQ: ZM) shares fell over 5% as well after reporting similar results.

Market bulls seem impressed by BBY’s beat, which overshadowed the ZM and DLTR misses.

Investors also ignored rising Covid infections in China this morning as stocks rallied. Fatalities and cases increased over the weekend, prompting new lockdown measures from Beijing.

Infections continued climbing through Monday.

“[I] think there were actually two more fatalities last night as well that the authorities reported very late this morning. So we’re getting to the levels that we’ve seen on both infections and fatalities that peaked in April of this year,” said TheStreet senior correspondent Martin Baccardax.

“So we are moving, or at least China is moving, in the wrong direction with respect to its Covid policies.”

Markets didn’t seem to care. A slight dip in the dollar, as reflected by the US Dollar Currency Index (NYSE: DXY), may have helped smooth things over after the dollar ripped higher on Monday.

The reason for today’s dollar retracement likely had something to do with a report from Japan’s Nikkei.

According to the media outlet, China purchased roughly 300 tons of gold last quarter as part of its latest gold stockpiling campaign.

“China and some other countries must be hurrying to reduce dependence on the dollar,” the report read. News broke of the 300-ton purchase two weeks ago, but the buyer chose to remain anonymous (even though almost everyone knew China did it).

A mystery purchase of “this magnitude is unheard of” according to Koichiro Kamei, a precious metals analyst.

“Seeing how Russia’s overseas assets were frozen after its invasion of Ukraine, anti-Western countries are eager to accumulate gold holdings on hand,” added Emin Yurumazu, a Turkish economist based in Japan.

Market analyst Itsuo Toshima also concluded that “China likely bought a substantial amount of gold from Russia.”

Russia’s gold holdings totaled over 2,000 tons before the transition, which was a win-win situation for both countries. Russia needed cash. China wanted gold to distance itself from the dollar.

And thus, the dollar retreated this morning.

But will the losses continue? If China locks itself down further, probably not. Not even another 300-ton gold purchase would derail the dollar rally in a significant manner.

For China, though, hoarding commodities is nothing new. JPMorgan analysts noted in March that “while the world is short on commodities, China is not given they have started stockpiling commodities since 2019 and currently hold 80% of global copper inventories, 70% of corn, 51% of wheat, 46% of soybeans, 70% of crude oil, and over 20% of global aluminum inventories.”

We’re eight months removed from that report. China has only accumulated more of these commodities since then, while the US willingly sells oil from its strategic petroleum reserve to Europe (something that contributed to almost the entirety of the US Q3 GDP gain).

Simply put, the case for a longer-term dollar disconnect is there. But until China can get clear of its Covid lockdowns, the dollar’s recent rally probably has legs to run a little longer.


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