Since the announcement of QEternity by the Federal Reserve in September the Chinese Yuan has been on a tear versus the U.S. Dollar.  However, the Fed has steadfastly refused to actually open up the money printing spigots as it announced it would and has actually been tightening the base money supply and holding credit growth down.  What they are doing in the swaps and repo market, however, is more opaque, but the point stands that the Yuan rising from $6.34 to $6.22 versus the U.S. Dollar when the Fed has not been printing but the PBoC has — two massive injections of cash into China’s interbank system in November alone — makes little to no sense.

Unless one factors in the reports that China has begun settling all of their oil trading in Yuan and not using the Dollar as the intermediary anymore.  Once one begins to consider the implications of this and the potential for Yuan demand versus Dollar demand the change in exchange rates makes a whole lot more sense.

The monetary statistics for this week will be out later today from the Fed and it will be the first report they make where the numbers are updated since the U.S. Presidential election.  The cover story has been that Bernanke and the Fed were scared to implement QEternity with there being a chance of a Romney administration but that idea now rings really false.  The Fed wants a cheaper dollar versus the Yuan but also still needs a market for U.S. Treasury debt of which the Chinese are no longer buyers.

Add in a little fiscal cliff fear and there’s headline stability while the structure of the market underneath shifts radically.