I’ve been saying for a long time that the Petrodollar system will not die all at once.  It will do so by a thousand tiny cuts.  In the past 18 months or so China has signed more than 30 bilateral trade or currency swap agreements with countries around the world.  Last year the big one was between it and Japan.  One of the U.S.’s staunchest allies had signed an agreement which would cut out the necessity of converting Yuan or Yen into Dollars in order for Japanese and Chinese firms to do business with each other.  Yuan for Yen.  This year it’s the Aussies’ turn to upset the status quo.  PM Julia Gillard has made it clear that a bilateral trade agreement that cuts the Dollar out of Australia’s trade with China is her top priority next week when she visits Beijing.

The cynic in me says that not three months after Japan and China hook up the Japanese make an unfathomable move to purchase a bunch of disputed islands in the East China Sea which sparks a wave of anti-Japanese sentiment across the country and trade between the two nations — Japan at the time was China’s largest trading partner — fell off the map.  So, what are the Aussies going to do this summer to tick off the Chinese?

I don’t believe in coincidences.  China also set up a huge currency swap with Brazil along with the announced change to trade relations with Australia.  If you don’t think this has something to do with the crazy stuff going on in Cyprus and the rest of Europe, I would suggest reviewing things again.  China accounts for one-third of Australia’s trade.  This is a major blow to the U.S. and The Fed will have its hands full now attempting to soak up all those dollars they will no longer be using.  There are only so many you can dump on Cambodia, by the way, and even they’re sick of this.

The Yuan opened this week at record strength with respect to the Dollar at ¥6.193.