Market Watch

BRICS Nations New Trade Agreement

Looks like China and Brazil are ready to strengthen their economic ties further and continue to establish a work-around to the current worlds reserve currency and trade dynamic. Reuters reports HERE

BRICS members China and Brazil agreed on Tuesday to trade in their own currencies the equivalent of up to $30 billion per year, moving to take almost half of their trade exchanges out of the U.S. dollar zone.

The agreement, due to last three years and signed hours before the start of a BRICS summit in Durban, South Africa, marked a step by the two largest economies of the emerging powers group to make real changes to global trade flows long dominated by the United States and Europe.

Trade between the two countries totalled around $75 billion in 2012. Brazilian officials have said they hope to have the trade and currency deal operating in the second half of 2013.

At the summit in Durban, the fifth held by the group since 2009, Brazil, Russia, India, China and South Africa are widely expected to endorse plans to create a joint foreign exchange reserves pool and an infrastructure bank. They are also due to discuss trade and investment relations with Africa.

Looks like the timetable has been upped some from the last time we check on this. An established foreign exchange reserve and infrastructure bank could severely undermine the dollar’s supremacy at a point where a swing in power is clearly evident.

Bloomberg Notes:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund. “The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.”

The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe.

Trade within the group surged to $282 billion last year from $27 billion in 2002 and may reach $500 billion by 2015, according to data from Brazil’s government. Foreign direct invesment into BRICS nations reached $263 billion last year, accounting for 20 percent of global FDI flows, up from 6 percent in 2000, the United Nations Conference on Trade and Development said on its website yesterday.

“If they announce a BRICS bank it will be quite something,” O’Neill said in an e-mailed reply to questions on March 15. “At a minimum it symbolizes they can achieve something as political group and means lots of other things could follow in the future. It also means that they will have their own kind of special World Bank, which may aid infrastructure and trade projects.”

Interest rates near zero in the U.S., Japan and Europe have fueled foreign investors’ appetite for higher-yielding assets, driving up currencies from Brazil to Turkey. Brazil has warned of a global currency war as nations take reciprocal action to weaken their currencies and protect export industries.

Full Bloomberg Article can be viewed HERE