Another month, another $10b (or more)
The $10b a month club came through in April.
Brazil’s reserves: up $12.3b in April. Bacen also did a $3b reverse currency swap – its largest ever – last week. It isn’t just intervening in the spot market.
Russia’s reserves: up an incredible $30.3b in April. Maybe $4b of that comes from “valuation gains”; it is mostly real.
India’s reserves: up $5b or so in April, with a bit over $2b of that from “valuation gains.” And India has scaled back its intervention, big time, after the huge blow-out in its reserves in February. The rupee is up sharply.
We won’t know much about China’s April reserve growth for a long time, but Jon Anderson of UBS notes that the pace of sterilization suggests that the strong pace of reserve growth in the first quarter continued. Remember, the first quarter was really big – over $40b a month on average.
The second division of reserve accumulation held their own as well.
Korea’s reserves were up $3.35b in April. Some of its “investment profits” may stem from the currency market – the BoK is high on my watch list for central banks that may be diversifying.
Saudi Arabia won’t report its April reserves for a while. But Saudi's March reserve growth was strong, as oil prices rebounded.
There is another bit of data suggesting strong reserve growth: the growth in central bank custodial holdings at the New York Fed. Those custodial holdings rose $47b between March 28th and the latest data release (which picks up a few days in May). That is in line with the $42.5b average monthly growth in the first quarter. Big bucks. Big flows.
I find it surprising that so many analysts still talk of the emerging world’s embrace of floating rates. Floating rates are a bit hard to square with record levels of intervention.
The emerging world seems to have embraced undervalued exchange rates -– or at least exchange rates that currently can only be maintained with massive intervention — far more than floating rates.
Simon Derrick of Bank of New York seems – to me – to have it right. Reserve growth has picked up enormously in the emerging world over the past few quarters. And the gap between the policies of the US and Europe –they now intervene far less than they used to – and the policies of the emerging world – which now intervenes more than ever – has grown. Globalization here hasn’t brought policy convergence.
Mansoor Mohi-Uddin of UBS argues – as John Authers reports – that a surge in Chinese and Russian reserves an associated surge of Russian and Chinese sales of dollars for euros and pounds as both sought to hit their portfolio targets explains some recent euro and pound strength.
Maybe.
There is certainly reason to think that Russia’s very strong recent reserve growth will slow once the Yukos auction ends. And since Russia has a low dollar share in its reserves, that should slow Russia’s need to sell dollar’s for euros. But even so, I can see an argument why private capital might prefer rubles to dollars, so I am not sure all the inflows are Yukos related either.
However, I don’t think China’s reserve growth is likely to slow (especially if you include the state investment fund). Sure, a lot of one-off factors contributed to the strong q1 increase – including the expiry of some swaps and perhaps the repatriation of offshore IPO proceeds. But China’s trade surplus is typically rather small in the first quarter as well. Consequently, I suspect that over the course of the year, the one-offs that pushed up China’s q1 reserve growth will fade – but the ongoing rise in China’s trade surplus will keep reserve growth very strong.
I might suggest one modification to Mansoor Mohi-Uddin argument.
Shifting dollars from the banks to the central bank shouldn't necessarily lead to any net additional dollar sales. Wen state banks moved dollars back to the central bank, China in some sense wasn't buying any new dollars.
On the other hand, China’s banks likely hold most of their foreign assets in dollars. They did swaps with the central bank in dollars I think, and they presumably don’t want additional exchange rate risk. China’s central bank, by contrast, likely has somewhere (my estimate) between 70 and 75% of its reserves in dollars. Moving money from the banks to the central bank consequently could lead to a higher level of dollar sales.
That matters, because I don’t think all of China’s hidden reserves materialized in the first quarter.
If Russia has a 50/50 dollar/ European currencies portfolio (the oil fund is 45% dollars/ 45% euros/ 10% pounds I think, but the rest of Russia’s reserves may have a slightly different currency composition – and I wanted to keep the math easy), the rise in Russia’s reserves from $300b or so at the beginning of the year to $370b or so now required that Russia add about $35b to its dollar portfolio, and around euro 22b (a bit less) to its euro portfolio. If Russia intervenes exclusively in dollars and gets paid for its oil in dollars, that requires buying about $30b (at April prices) of euros and pounds in the market.
Note that the euro and pound “flow” addition to Russia’s reserves are smaller than the flow addition to Russia’s dollar reserves. That reflects the impact of the rising dollar value of Russia’s existing euros and pounds in a “constant portfolio share” model. China’s reserves went from around $1070 to $1200b in the first quarter. Keeping a 70/30 portfolio would require adding $90b to its dollar reserves, bringing the total up from $750 to $840b, and adding a bit over euro 20b euros/ pounds ($27b dollars at the end march exchange rate) to its euro and pound portfolio. April would require more dollar sales.
I left Brazil out because its reserves are mostly in dollars. We know what it is doing.
UBS figures that Russia and China made these sales – over $60b in sales counting any reasonable estimate for China in April, and those sales will wane as Russian and Chinese reserve growth slows.
That is one possibility. UBS sees a lot of flows.
But there is another possibility. Maybe Russia and China were not able to sell quite enough dollars for euros or pounds to keep the dollar share of their portfolio from rising.
Russia probably did sell what it needed to sell. The Russians aren’t very keen on the dollar.
But China might not have wanted to put additional pressure on the dollar. Remember, dollar weakness means RMB weakness unless China changes its policy. The UBS story suggests central bank dollar selling will fall off.
A story where central banks weren’t able to sell enough dollars to keep the dollar share of their portfolio from rising suggests central banks are currently holding more dollars than they want. It consequently implies that they are looking to sell some of the dollars they bought in q1 — not just some of the dollars they are buying now –into any sign of dollar strength.
At this stage, I don't think we know enough to know which of these stories better fits the data. If anyone has a good sense of the magnitude of central bank dollar sales in q1, do tell!
Welcome back–I hope you can share some insights from the Euromoney conference. Anyway…
(1)The Russians aren’t very keen on the dollar.
Dem Russians are smart.
(2) Thanks for bringing the FT Authers op-ed to our attention. I was fascinated by
Dollar weakness is not new. In January 2005, Saturday Night Live, the US comedy show, featured a sketch called “The Not So Incredible Adventures of the Down-and-Out Dollar”. One actress, dressed up as a dollar bill, had to suffer the jeers of fellow comedians dressed as a euro, a pound and even - with great glee - a Mexican peso.
All the same, the proofreaders at the FT must have been smoking pretty good stuff to allow something like this to get through:
Traders look at the direction and momentum of exchange rates and try to capitalise. Hence strategists such as Chandler are suggesting that the dollar has further to fall - maybe to £2.06 or to €2.40 before a psychological low is formed.
Not only does Authers have the signs wrong (they should be in $ relative to one pound and one euro), but he also appears to misstate “2.40″ instead of “1.40″. If not, good grief for the EMU if EUR/USD goes to 2.40!
(3) Here is something for the good RGE folks to ponder: what is the opportunity cost for developing countries holding excess reserves? It’s really interesting that they keep piling up reserves and work should continue on this topic for obvious reasons, but is this pile better spent elsewhere? For this political science major, public policy is the final frontier.
ultimately, if they can manage to convert their (excess) reserves into “global infrastructure” [or global public goods that are underprovisioned? think of the b&m gates foundation...] thru their SWFs/SICs or whatever, then it needn’t be so bad, i don’t think; altho, of course, the devil is in the details…
Something else to ponder: Japan, China and S. Korea may pool reserves.
But who will need to borrow those pooled reserves? right now, Asian reserves are uniformly high and rising …
of course, things could change, but it still seems to me that asia’s core problem is that almost everyone has too many reserves, not that some have too few and others too many (which creates demand to share reserves). tho I guess you could argue that indonesia’s reserves are still a bit on the low side (philippines reserves used to be a bit low, but they are rising fast now — the intra-asian carry trade).
Emmanuel — i think the last portion of this post is implicitly a commentary on the euromoney conference, and especially Modi-Uddin’s presentation.
The problem, of course, is that neither Mansoor, you, me, or anyone else knows when/if China et al get back to benchmark. As the old saying goes, those who know don’t say, those who say don’t know.
That CBs garnered so much attention, however, in some way validates the findings of my own poll, in which a large majority of respondents found CBs to be hegemonic actors within the G10 FX space.
Brad,
Are you sure that the Brazil fx swap is related to intervention? A swap itself is like a repo of currency rather than an outright sale. Maybe this was a domestic money market transaction, like the Swiss used to do - in this case, adding liquidity. If so, the $3bn will leave the reserves when the swap unwinds.
rebel — it was a reverse swap, and it most certainly is a form of intervention (follow the link). Bacen did all sorts of swaps back in 2002/03 when the real was under pressure to depreciate (effectively selling insurance against depreciation to discourage $ purchases) and now it selling insurance against real appreciation to dsicourage the outright purchase of real.
MM — technically, we don’t even really know if the PBoC is over its benchmark, right at it or under it … we are all just kind of guessing.
Brad,
The link is to BoNY rather than to any definitive source of information, so it is not clear which way round the swap was done. However, an fx swap alone does not constitute intervention whichever way round it is done - recall the discussion about the carry trade with Andrew Rozanov earlier this year. Actually, it would make most sense if the swap had been done as a sterilisation operation, and involved lending dollars…..I looked on the BaCen website under open market operations, and they do seem to use fx swaps for this purpose.
A swap is intervention with term structure - the maturity of the swap unwinds the intervention (unless the swap is rolled over). Intervention is not limited in concept or practice to outright transactions.
Guest,
I would not describe an fx swap as foreign exchange intervention, because it should have little effect on the exchange rate, since the unwind is locked in when the swap is done - like repo has little effect on long term bond prices. Central banks tend to use fx swaps more for domestic money market operations - note that the BoNY morning update link mentions that Australia do this. BoNY are not clear about whether the central bank was providing or receiving dollars in the swap they mention, but it looks as if they were providing dollars anyway.
R economist
Bond repo is a little different I think - the underlying bonds also have term structure whereas spot FX doesn’t, although I’m not sure how relevant that is here.
But in the case of FX swaps - for example - buy dollars spot, sell dollars forward - there is still a marginal effect in alleviating downward pressure on spot when desired by CBs, while deferring/translating that downward pressure to the forward. The CB can choose its level for spot and negotiate the forward compensation from there. It’s still spot intervention.
Asian finance ministers agree to pool foreign reserves to defend against Wall Street Hedge Fund speculative attacks
http://www.sinodaily.com/2006/070505104420.yda5gubi.html
Asian finance ministers agreed Saturday to pool part of their huge foreign exchange reserves to shield themselves against a repeat of the financial crisis that rocked the region a decade ago.
In an effort to bolster their defences, ministers agreed in principle on a system of pooled foreign currency reserves to replace the existing bilateral emergency currency swap system.
Although the full details have yet to be thrashed out, the idea of the overhaul is to enable a country to borrow foreign currency from another more quickly to shore up its international reserves until a crisis passes.