China’s holdings of US Treasuries rose for the third straight month in April, reaching the highest level since October 2016 at $1.09tn, as weakness in the country’s currency has begun to show signs of stabilising.
It comes after a period of sustained selling by Beijing, with 2016 marking the largest cut to China’s treasury holdings on record. The cut to China’s holdings came as Beijing sought to support the renminbi and manage capital flight by intervening in foreign exchange markets.
So far this year the renminbi has strengthened and China has tentatively returned to the Treasury market, buying $41.1bn of securities since January, with $4.6bn added in April. Still, the country’s holdings remain well below levels at the same time last year of $1.24tn, leading to it slipping into second place behind Japan as the largest foreign holder of Treasuries.
Japan cut its holding by $12.4bn in April to $1.11tn. Belgian holdings, seen by some as a proxy for China due to speculation that China executes through the European sovereign, fell to $96.4bn – below $100bn for the first time since August 2011.
Overall, foreign holders shed $28.6bn bring the total foreign ownership of Treasuries to $6.07tn.
Previews of the Federal Reserve interest rate decision from 15 firms
Overall, the consensus seems to expect the Fed to deliver a dovish hike with few see a hawkish hike and only one (Danske Research) sees the Fed skipping hiking at today’s meeting.
TD Research: We think the market is underestimating a hawkish hike from the Fed. This is because the median dot-plot should remain unchanged to confirm 3 total hikes this year and another 3 next, which is well above current pricing. Further, we think the risk of an acute discussion of balance sheet normalization could surface this week. The combination of both should compel a hawkish re-pricing in the Fed outlook.
Credit Suisse Research: With the market 90% priced for a 25bp rate hike, we do not expect much USD upside from such an outcome alone. Rather, we would need to see a statement, forecast changes or a Q&A with Fed chief Yellen that allows room for the market to fully price in another hike for 2017 H2.
Credit Agricole Research: We expect the FOMC to raise the fed funds rate by 25bp: the hike is fully priced in and doing otherwise would trigger market volatility that the Fed would be keen to avoid…There should not be any formal announcements with respect to the balance sheet policy but that could come as soon as the September meeting. Indeed, the risk is that the Fed could hint at an earlier balance sheet exit than the market is currently expecting. Coupled with an unchanged dot plot this could be enough for the US yields and the USD to move higher after the Fed.
Less than a month ago a handful of the world’s policy makers gathered in Washington at the International Monetary Fund (IMF), no surprising headlines were run – but an obscure meeting and a discreet report launched exclusive signals for the next global economic crisis.
The panel, which included five of the most elite global bankers, was held during the IMF’s spring meetings to discuss the special drawing rights (SDR) 50th anniversary. On the surface the panel was a snoozefest, but reading beyond the jargon offers critical takeaways.
The discussion revealed what global central banks are planning for a future crisis and how the IMF is orchestrating policy for financial bubbles, currency shocks and institutional failures.
Why the urgency from the financial elites?
In his opening remarks Obstfeld identified, “There has been increasing debate over the role of the SDR since the global financial crisis. We in the Fund have been looking more intensively at the issue over whether an enhanced role for the SDR could improve the functioning of the international monetary system.”
“The official SDR is something we are familiar with but is there a role for the SDR in the market or a market SDR? What is the SDR’s role for the unit of account?”
Here’s the five most important signals from the world money panel, what they could mean for the international monetary system and the future of the dollar.
Malaysia’s central bank said it will allow investors to fully hedge their currency exposure.
Egypt declared a 3-month state of emergency after two deadly church attacks.
South Africa’s parliamentary no confidence vote has been delayed
Argentina central bank surprised markets with a 150 bp hike to 26.25%.
Brazil central bank accelerated the easing cycle with a 100 bp cut in the Selic rate.
In the EM equity space as measured by MSCI, South Africa (+3.1%), Turkey (+2.5%), and the Philippines (+0.9%) have outperformed this week, while Russia (-3.9%), Peru (-3.4%), and Brazil (-2.6%) have underperformed. To put this in better context, MSCI EM fell -0.3% this week while MSCI DM fell -0.7%.
In the EM local currency bond space, South Africa (10-year yield -18 bp), Poland (-8 bp), and Indonesia (-8 bp) have outperformed this week, while Brazil (10-year yield +11 bp), Peru (+9 bp), and Colombia (+9 bp) have underperformed. To put this in better context, the 10-year UST yield fell 15 bp to 2.24%.
In the EM FX space, ZAR (+2.5% vs. USD), RUB (+1.9% vs. USD), and ARS (+1.2% vs. USD) have outperformed this week, while HUF (-0.9% vs. EUR), KRW (-0.5% vs. USD), and PLN (-0.5% vs. EUR) have underperformed.
The U.S. Treasury Department has decided not to label China a currency manipulator in a report published Friday on the foreign exchange policies of America’s key trading partners, backing away from President Donald Trump’s campaign promise to do so.
The move was apparently taken out of consideration for China, which the U.S. hopes will help rein in North Korea’s nuclear and missile programs.
This was the Trump administration’s first release of the twice-yearly report, which evaluates the foreign exchange policies of major U.S. trading partners.
Although the report did not signal a major shift in Washington’s own currency policy, it is likely Trump will try to use the issue as a bargaining chip in negotiations with other countries. The U.S. may try to limit the dollar’s rise against the yen in its first economic dialogue with Japan, scheduled for Tuesday. Japan’s large trade surplus will probably be high on the agenda.
Trump’s Treasury Department used the same standards for determining currency manipulation as those of the previous administration under President Barack Obama. The report kept China, Japan, South Korea, Taiwan, Germany and Switzerland on a watch list as they met some of the criteria.
When it comes to Nigeria’s currency, mind the gap, again: the spread between the official and parallel market rates for the naira is widening once more.
During a more than two-week run, the naira strengthened to a six-month high of 390 per dollar on the black market – close to one of the multiple official exchange rates, but still far off the interbank rate of around 305 to the dollar.
However, the naira is weakening once more on the black market, slipping below 400 to the dollar, to 405 to the dollar on Monday, according to traders.
Chronic dollar shortages in Nigeria began after oil prices crashed in 2014, worsened as the central bank restricted supplies of hard currency, and are unlikely to end any time soon.
In the absence of adequate supplies of dollars in the official market, businesses and individuals have been forced to buy hard currency on the black market, stoking demand there and eventually weakening the naira to a record low of 520 in February. Analysts said the gap between the official rate of just over 300 to the dollar and the black market one indicated the scale of unmet demand for hard currency in Africa’s most populous nation.
Hedge funds have cut their short position in 10-year Treasury futures by nearly two-thirds from a one-year high set at the start of March, unwinding a popular trade as US sovereign debt has rallied.
Leveraged funds, a proxy for hedge funds, reduced their net short in 10-year Treasury futures by nearly 49,000 contracts in the week to April 4, data from the Commodity Futures Trading Commission showed on Friday. The net short totaled 136,322 contracts, down from 365,650 contracts on March 7.
Traditional asset managers, who have taken the opposite side of the trade, have also reduced their net long to 226,655 contracts, the lowest level since February.
The divide has represented in part a difference of opinion on the likely path of interest rates in the US. It widened markedly after the Federal Reserve signalled last year that it would tighten policy by at least three quarter-point rate rises in 2017.
The central bank’s perceived hawkishness, alongside a sell-off in Treasuries after the US election, sent yields on the 10-year Treasury to a high of 2.62 per cent in December. Yields on the note have since slid, as the so-called Trump trade fades.