It’s a problem that has been talked about before — inside China it’s what the yuan does against the dollar that seems to matter. Which is awkward because China is quite keen on people concentrating on what it does versus a basket of currencies.
The potential consequence of that USD fixation is that if the $/CNY rate goes higher then there is a risk that capital flight picks back up again in tandem with expectations of further depreciation, no matter what the RMB is doing against that currency basket.
In the words of Goldman’s Robin Brooks and team:
China is pursuing a shift in its currency management, towards a trade-weighted exchange rate and away from the bilateral exchange rate versus the Dollar. That shift makes sense conceptually, given that monetary policy normalization in the US is likely to push the Dollar up, so that some weakening of the RMB versus the greenback can certainly be justified given China’s cyclical position. But the shift to a trade-weighted exchange rate has a weak link, which is that the main signal for households and businesses within China remains the bilateral exchange rate versus the Dollar.
Then being the ‘taper tantrum’ in 2013.
Now being the recent China devaluation episode that caught so much of EM FX in its backdraft.
From Goldman’s chief FX strategist Robin Brooks, and with our emphasis: Read more
Not so bad this month, particularly when you take into account expectations and the headline $94bn fall we saw in August.
A chart, from Deutsche, of the global pool of funds in 2014:
It’s from their annual Random Walk through the world’s financial markets. The top line: Read more
Imagine the scenario. It’s 2025 and the volume of home-produced oil is so great that the US is near energy independent as far as crude imports are concerned.
With that energy independence, the amount of dollars flowing out of the US and over to net energy producers (and traditional dollar reserve hoarders) such as Saudi Arabia, Russia and Mexico has come crashing down.
So how would such a dollar-flow contraction affect the global economical and political balance?
According to Citi’s credit team, it would likely affect things a lot. Especially so in the credit markets. Though, what’s really interesting … they believe the effects of a petrodollar shortage may already be showing up in credit markets. Read more
We might just strip out one more thing from Deutsche’s recent report on Bretton Woods 2.o, namely the bit about how the growth of Chinese “reserve holdings associated with export-led growth provided de facto protection for foreign private investors in emerging markets and thereby caused the gross flows” needed for China’s growth strategy.
The point being that private capital flows generate political risk — “haha, all your FDI are belong to us” — and, without some sort of collateral, flows from rich countries to poor countries will be held back. Think of China’s reserves as a $4tn hostage which stops China from throwing its weight around and stands in the way of a geopolitical breakdown. With it in place, foreign capital becomes more comfortable heading into China. The idea from Deutsche is that this was the only way to get China’s development model to work on the scale it has. Read more
China snuck something out last Friday that just might be pretty significant…
From the FT: Read more
It’s Swiss National Bank reserve figures Wednesday! That glorious day when we get to see how exactly the ingredients of the SNB’s cake have changed. Or to put it more literally, how have they been dealing with the masses of euro assets they are collecting.
Here’s the table in question. What it shows is that the SNB has cut its euro share of FX reserves to 48 per cent from 60 per cent in the second quarter of 2012 while the proportion of sterling and dollars being held increased.
Gasp? Well… yes. Read more
There have been a few estimates of large scale capital flight out of China recently that don’t exactly tally with other signals. The strength of the yuan is among them, though it admittedly may be explained by myriad other factors.
Capital flight has largely been calculated by movements in China’s FX reserves, with reference to other variables such as the trade surplus, FDI and movements in exchange rates. Read more
It made headlines when the majority of 80 or so central bankers attending a conference organised by UBS last week reported that they thought at least one eurozone country would leave the currency union within five years:
The end-users, the clients, the buyside. Or in more standard parlance – institutional investors. Not “buyside” like hedge fund — more like your pension fund, insurance companies, reserve managers, sovereign wealth funds, and investment funds more generally.
While chapter one of the IMF’s Global Financial Stability Report covered the €200bn capital hole spillovers, chapter two discusses the characteristics and behaviour of institutional investors. Read more
From the annals of financial repression, we bring you Libor rates.
It’s a torrid tale of QE2, dollar funding and liquidity — and it’s one we thought we’d mention, given that the Federal Reserve’s second bout of quantitative easing has just come to an end. Read more
The dollar is down, the euro is out, and SDRs are in. Results from UBS’s reserve management survey, canvassing institutions with a collective $8,000bn of assets:
Up until April this year, US banks had a nice little earner.
As Freakonomics explained, big banks were able to borrow cash from the Fed funds or repo market for say, 15 basis points, posting US Treasuries as collateral, and then deposit the cash received with the Federal Reserve overnight at 25bps, earning some 10bps. The FT has estimated that since late 2008, this risk-free arbitrage may have netted America’s banks as much as $200m in profits. Read more
The People’s Bank of China said it won’t sterilise its biweekly open market operation on Thursday, after money market rates more than doubled in the past six days alone.
Front-loading time is upon us.
For today is the start of the European Central Bank’s new maintenance period. Read more
Gold prices hit on Monday a fresh record high of almost $1,265 a troy ounce following the revelation that Saudi Arabia, the world’s largest oil exporter, is sitting on more than twice as much gold as previously thought, according to new estimates, reports the FT. The disclosure points to the revival of bullion as part of emerging economies’ official reserves and comes as investors pour money into the yellow metal.
If most of the media agrees that China’s decision to enhance the yuan’s flexibility was a step in the right direction, many currency analysts are voicing some of their own reservations — not least in terms of the future of the PRC’s FX reserves, writes FT Alphaville. Read more
Some critics are doubtful about the significance of Beijing’s moves on the exchange rate of its currency — but the volumes devoted to China’s weekend statement on currency flexibility on Monday morning would suggest otherwise, FT Alphaville writes. Read more
China, which boasts the world’s largest foreign exchange reserves, is reviewing its holdings of eurozone debt in the wake of the crisis that has swept through the region’s bond markets, the FT reported. Representatives of China’s State Administration of Foreign Exchange, or Safe, which manages the reserves under the country’s central bank, have been meeting with foreign bankers in Beijing to discuss the issue.
China’s central bank said on Sunday it will raise the amount banks must hold in reserve for a third time this year, the latest move by Beijing to cool its booming economy, the FT reports. The increase came after regulators ordered China’s largest banks to re-examine their loan books and provide estimates of their exposure to un-collateralised loans, especially to provincial governments.
Remember, the good old days of China’s dollar bashing? Well, no more. There is a new victim in town, and it’s called the euro, FT Alphaville reports. Read more
Worried about Chinese banks? Pfiff.
Standard Chartered has some intriguing reasons why you don’t need to be – all revolving around the strength of the banks’ sovereign backer, the People’s Republic of China. Perhaps you’ve heard of it? Read more
Minutes from the Bank of England’s last policy meeting on November 4 and 5 have been released. And there are number of points to pick over.
The most interesting is that the MPC was split three ways in voting to extend asset purchases by £25bn. Read more
New liquidity rules for UK banks, announced by the Financial Services Authority on Monday, slightly overshadowed an announcement from the Bank of England on the subject of reserves accounts.
As the BoE press release noted (our emphasis): Read more