The Yuan’s Reserve Status

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There is nothing quite like a falling dollar to spur take of the erosion of the greenback’s reserve status.  There has been talk for several months that China is preparing in yuan-denominated oil contract (with an embedded gold option).  It has not been launched yet, but some observers see it as a blow to the dollar’s role.

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Treasury Holdings

Tsy holdings

The combination of a falling dollar and rising US interest rates has sparked a concern never far from the surface about the foreign demand for US Treasuries.   Moreover, as the Fed’s balance sheet shrinks, investors will have to step up their purchases.    

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From the Securities Lending Trading Desk

This week the US are seeing increased demand for Overstock.com Inc. as interest and speculation grows around Bitcoin. Korean pharmaceutical manufacturer Celltrion Inc’s market value surged by over USD 8 billion in seven days making it the third largest company on the Korean stock exchange. Whilst in Europe, Tele2 AB’s acquisition of Com Hem Holding AB creates Sweden’s second largest mobile service and fixed broad band provider.

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Dollar Given a Reprieve

  • After extending its recent slide yesterday while the US markets were on holiday, the dollar is firmer today
  • News reports suggest that the EU has toughened its demands for a transition deal
  • The BOJ’s Kuroda reiterated his commitment to continue to pursue policies that will push inflation toward the 2% target
  • News yesterday that both the German and French central banks have purchased Chinese yuan for reserve purposes is notable but not surprising
  • Turkish assets fall as tensions with the US mount again

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Drivers and Views

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Market sentiment turned decisively negative toward the US dollar, which, while stretched technically, is strong downside momentum.
BOJ’s Kuroda remains committed to supportive monetary policy.
Bank of Canada is likely be the first major central bank to hike rates this year–this week.
Growth and market-based measures of inflation in the US are rising.

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EM Preview for the Week Ahead

blog-icons-empreview emerging markets previewEM FX continues to rally as the dollar remains on its back foot.  With no obvious drivers this week that might help the dollar, we believe EM FX can extend the recent gains.  Still, we continue to advise caution when investing in EM, as differentiation should again become evident as idiosyncratic risks remain in play. Continue reading

Dollar Bears Tighten Their Grip

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The consolidation/correction in the US dollar that we anticipated on technical grounds was brief and shallow.  A series of developments seemed to play into the bear’s hands.  The developments from the shift in how China sets the reference rate,  the wariness of some to expand its Treasury holdings, to less super-long bond buying by the BOJ and a more hawkish twist in the record of last month’s ECB meeting all seemed to provide new grist to sell the greenback.  The UK appears to have won over support from Spain and the Netherlands for softer terms for Brexit and this helps send sterling sharply ahead of the weekend after having fallen to two-week lows the previous day. 

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What Has Changed in EM

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  • China State Administration of Foreign Exchange (SAFE) disputed press reports that it was slowing or halting purchases of US Treasury bonds
  • Korean officials warned that it will take stern steps to prevent one-sided currency moves
  • Bulgaria is talking “intensively” with the ECB and other EU representatives about entering the Exchange Rate Mechanism by mid-year
  • Hungary announced general elections on April 8
  • Poland’s government shuffled the cabinet
  • Romanian central bank unexpectedly hiked rates for the first time in almost a decade
  • Angola devalued the kwanza
  • S&P downgraded Brazil by a notch to BB- with stable outlook Continue reading