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Global Central Banks Join The "Short Dollar" Bandwagon

Tyler Durden's picture


A recent piece by Barclay's Steven Englander demonstrates how everybody and the kitchen sink is soundly amused by Geithner's call for a strong dollar. "The IMF Composition of Official Foreign Exchange Reserves data suggest that central banks are doing more than talking about reducing the concentration of USD in their reserve portfolios. They are actually acting on their statements." This should come as no surprise to anyone following the Fed's central bank liquidity swaps which have plummeted to post-(and pre-) Lehman lows, as the Fed no longer needs to bail out its counterparts' short dollar positions.

Some highlights from Englander's report:

  • Q2 09 was the only time that central banks have accumulated more than USD100bn of reserves in a quarter, and the USD’s share of this accumulation has been less than 40%.
  • This is also the only time the EUR has accounted for more than 50% of the accumulation when central banks, in aggregate, have accumulated more than USD80bn.
  • The JPY’s share of the increase in reserves was 12%, by far the highest incremental JPY share since 2005.
  • The drop in aggregate reserves in Q4 08 and Q1 09 was almost all USD, but the recovery has been primarily in non-USD reserves.

How does this manifest itself graphically?

Figure 1 shows just how unprecedented it is for central bank reserves accumulation to be concentrated in non-USD currencies. Since 2006, in quarters when the central banks have been accumulating reserves, the USD has represented almost 70% of this accumulation on average, so Q2's 37% amounts to a big step down.

Since the global recovery got underway at the beginning of Q2, the USD has been among the weakest of the major currencies. By definition this means that the US current account funding needs, while lower, were not reduced enough to stabilize the dollar. Other data, in particular the US Treasury TIC data, show unambiguously that there has been an outflow of capital from the US. The US private sector has been buying USD30-40bn of foreign portfolio assets, effectively doubling the financing need implied by the US trade deficit. The foreign private sector has been selling US Treasury obligations.

The last sentence also is no surprise, because as pointed out on Zero Hedge first, the Fed now accounts for the majority of Treasury buying, in essence leading to a feedback loop whereby its primary goal is to lead to dollar destabilization.

As for the key ongoing divergence between the dollar and the euro, Barclays provides this observation:

To be blunt, this is little more than saying there were more sellers than buyers of USDs, and more buyers than sellers of high quality EM currencies at the exchange rate levels that prevailed at the beginning of the recovery. However, it helps address the issue of how we know that the global private sector was not selling EUR and other European currencies in order to buy EM assets. The reserve accumulation data show as much buying of the EUR as the USD, so why view one as being bought and the other as being sold? The difference is that the EUR has appreciated while the USD has depreciated over this period. This suggests that EM central bank buying of the EUR (in addition to whatever the private sector was doing) was sufficient to firm up the EUR, while USD purchases by EM central banks were not enough to keep the USD from falling.

And another red flag for Fed apologists, whose actions have been crucial in enforcing the weak dollar doctrine:

Our conjecture is that first, EM central banks acquired USD through intervention and then sold USD them versus the EUR and other currencies as a way of preventing their portfolios from becoming to top heavy in depreciating USDs. Historically, we have observed that the accumulation of non-USD and USD reserves occurs in parallel. (Figure 1 shows this as well.) We have also found that the central bank accumulation of reserves is strongly associated with USD weakness. So there is some reasonably strong circumstantial evidence that USD weakness within G10 is associated with central banks building reserves, which supports our conjecture above, that the dynamic is driven by the USD overhang rather than some exogenous demand for EUR reserves by central banks.

The conclusion from Barclays is startling, mostly due to its analysis of implications to the Eurozone (obviously negative) and that the JPY, despite its low yield, will likely become less of a carry trade focus in the years to come. This speaks volumes about how the rest of the world sees the American economy, even after Japan's two lost decades. What the future has in store for America apparently can not even compare with the Japanese experiment.

No one wants to be caught holding too many dollars, and this rising reluctance is increasing pressure on the USD. This is an obvious USD negative, but it is also means that the ECB and the EUR are caught between a rock and a hard place. The capital flows into the EUR have very little to do with any euro area cyclical dynamism. If the ECB were the BoC, it would label the current EUR appreciation as undesirable “type 2” flows driven by capital flows that do not reflect fundamentals. However, as anyone who has been to the doctor knows, getting a diagnosis is not quite the same as being cured.

One surprise to us is some renewed JPY accumulation in reserve portfolios after years of decumulation. Given the USD overhang, the zero-yield JPY may be more attractive than the zero-yield USD, even with all the negatives surrounding the Japanese economy and its prospects.

The last and more tentative takeaway is that claims in other currencies (non EUR, USD, GBP, JPY or CHF) rose more than 10% in Q2. It is hard to tell what currencies in this category represent and how much of the gain is due to valuation effects. However, it could be that some of the smaller G10 currencies are beginning to get a “look see” from reserve managers.

As equity markets now follow the DXY tick for tick, which in turn follows the actions of Ben Bernanke to the dot, it reinforces our thesis that at this time, investment decisions can be completely removed from corporate income statements, balance sheets, and most troubling, cash flow statements (as unfortunately there is little to none positive cash flow to even talk about) and the only focus is on such excess liquidity aggregator representations as the Z.1, the H.3 and the H.4.1. As for what is happening at that other bubble spewing economy, China, at this point it is really anyone's guess as to what is going on there.


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Mon, 10/12/2009 - 09:58 | 96402 mikeyv1970
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Whats up with the S&P locked up? Is screwing up my $VIX and all.


Mon, 10/12/2009 - 10:00 | 96404 AN0NYM0US
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dollar the focus on Bloomberg TV right now

Mon, 10/12/2009 - 10:00 | 96405 lizzy36
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BREAKING NEWS: odd lot caused new ytd interday high on SPY.

Mon, 10/12/2009 - 10:03 | 96407 mikeyv1970
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And looks like it broke the computers when it did it. S&P has been showing 1075.06 for quite some time...CNBC also showing the same...weird.


Mon, 10/12/2009 - 10:03 | 96408 mikeyv1970
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Mon, 10/12/2009 - 10:07 | 96412 Cheeky Bastard
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A message reading " I WILL NOT OBEY !!!!!1 " showed up on HAL9000 screen.

Mon, 10/12/2009 - 10:10 | 96419 mikeyv1970
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Interesting this hasn't even rated a mention on CNBC or Bloomberg's websites...just turned on the telly so no clue if they are discussing this live or not.


Mon, 10/12/2009 - 10:11 | 96420 mikeyv1970
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CNBC has 1079 and looks like a feed.  Guess the Internet feed is jacked up.


Mon, 10/12/2009 - 10:55 | 96469 Hephasteus
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Routers are probably getting jacked up from all this record cold global warming.

Mon, 10/12/2009 - 10:33 | 96445 lizzy36
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amusingly we usually only get these "technical issues" on sell offs.......


Oct. 12 (Bloomberg) -- The Standard & Poor’s 500 Index isn’t updating because of a technical problem at the Chicago Board Options Exchange, according to data compiled by Bloomberg.

Mon, 10/12/2009 - 10:10 | 96417 Gilgamesh
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There a joke in here somewhere about new markets highs during a bank holiday.  Or HAL9002 SPX refusing to acknowledge a new high on volume < 1000.

Mon, 10/12/2009 - 10:50 | 96464 Hephasteus
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LOL timmah in his IMF wheelchair.

Mon, 10/12/2009 - 10:17 | 96425 mdtrader
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Everyones a winner from the dollar decline. Apart from those people paid in dollars, who have flat or deflating wages, and hence can buy less and less things with their wages. Is this bullish or bearish for an economy where 70% of GDP comes from consumer spending? Answers on a BB.

Mon, 10/12/2009 - 10:20 | 96431 Anonymous
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$XMI is tracking thingsn pretty good so far

Mon, 10/12/2009 - 10:21 | 96432 Anonymous
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Looks like a perfect set up for an emergency fed funds rate increase to me...

Mon, 10/12/2009 - 10:23 | 96434 Anonymous
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they better hurry.. IYG is starting to slip away on them.. somebody hit hal9000 with a defip pack quick

Mon, 10/12/2009 - 10:26 | 96438 AN0NYM0US
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Summers: "average 401K up 35% since market lows and housing stabilizing too"

from a speech he will be giving in St. Louis at the noon hour today



Mon, 10/12/2009 - 10:39 | 96452 Miles Kendig
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Too bad for Larry, Curly and Moe more funds have been withdrawn to cover the mortgage than have been left behind to "appreciate".

Mon, 10/12/2009 - 10:28 | 96439 putbuyer
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Jim Rogers "Quite Sure" Gold Will Hit $2000, Dollar Will Lose Reserve Status
Mon, 10/12/2009 - 10:37 | 96449 Gilgamesh
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What was his take on the S&P and DJIA made in jest earlier this year?  Could see 50,000 / 1,000,000 and wouldn't be surprised...

Mon, 10/12/2009 - 13:37 | 96641 QuantumCat
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I think Jimbo is right, but on what timeline? 

Mon, 10/12/2009 - 10:33 | 96442 Gordon_Gekko
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I guess the foreign central banks forgot to look at Bobby Prechter's dollar "sentiment survey".

Mon, 10/12/2009 - 14:17 | 96681 QuantumCat
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"Belief in wizards runs deep," to quote Michael Shedlock. 

Dollar devaluation fear is more rampant here than it was at the low last year... sounds like a low is in the making... this is not "mid" run sentiment.  Central Banks are simply confirming that. 

Mon, 10/12/2009 - 10:40 | 96447 Miles Kendig
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The feedback loop gains momentum as the party at the pool widens to include central banks on the set up.  As CB postulates, to the last gram, hooker and beyond.


Mon, 10/12/2009 - 10:37 | 96448 rhinotrader
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The market I used to know could only be manipulated for a min, day, maybe a week. What is going on with it now? Where is the calvary that knows if GS is long they will bring it down hard. Self-correct stocks like Taser and Enron. AIG is trading like a tulip and getting a free ride. Where is the volume? Where are the movers? Never thought gov't could have this type of pull.

Mon, 10/12/2009 - 10:37 | 96450 HEHEHE
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When I read these headlines all I can say is watch out. The anti-dollar trade has been one-sided for six plus months and getting more and more crowded.  I am a long-term (over next 10 yrs) dollar bear but a short-term violent correction wouldn't surprise me in the least.  This seriously reminds me of oil in the summer of 2008.

Mon, 10/12/2009 - 10:44 | 96456 Miles Kendig
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I am reminded of the GBP during the period as Brown ran the pound into the ground in the attempt to salvage his banking sector. Same genetics, history and thinking.

Mon, 10/12/2009 - 11:55 | 96533 Gordon_Gekko
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I am more interested in riding the long term trend than trading any and every correction. I will be short the dollar as long as it exists - period.

Mon, 10/12/2009 - 10:43 | 96454 HEHEHE
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Actually, you'll likely know when to sell when GS issues a super dollar bearish analyst report like they did calling oil over $200 by the end of 2008.

Mon, 10/12/2009 - 10:54 | 96467 docj
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OT: Could we start a petition to have Jon Nadler fired from Kitco?  (A complementary petition to have him flogged in public should similary be considered.)  He single-handedly drives-down the IQ of that otherwise awesome site by about 20-points on an average day.

Well, given his latest missive on how the death of the dollar is greatly exaggerated I suppose it's not entirely unrelated after all.

Mon, 10/12/2009 - 11:49 | 96527 Gordon_Gekko
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John Nadler is a moron; Jesus man I don't even know why people read or mention him. I just mistakenly read one article by him once and I immediately knew he was an idiot, and let him know as much via email. Never read him again. JUST STOP READING HIM PEOPLE.

Mon, 10/12/2009 - 13:35 | 96636 Gilgamesh
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The day he writes a non-bearish piece on the price of gold is the day I consider taking some profits.  I love having him out there as the headline contributor every day.  Of course, if I wasn't continually buying maybe I would like him to give up the ghost.  Can someone confirm if he is the brother of Jerry Nadler (they talk with the same sense)?

Mon, 10/12/2009 - 16:04 | 96778 Anonymous
Anonymous's picture

John Nadler is not a particularly bad guy, but he believes that supply and demand are the only factors, which I think is incredibly naive in the current state of affairs.

Mon, 10/12/2009 - 11:12 | 96482 Anonymous
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The US gubberment's handling of the currency is a big fat effing disgrace. No country, no nation ever did well screwing with its own coin. Throw the bums out!

Mon, 10/12/2009 - 11:21 | 96491 Anonymous
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"What I'm looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I'm looking at is where is gold going to be vis-à-vis the dollar one year from now, three years from now, five years from now. And I think, with a high probability at each of those points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point." -- John Paulson, Paulson & Co.

Mon, 10/12/2009 - 11:44 | 96519 Gordon_Gekko
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So who will you go with? Robert Prechter or John Paulson. My money is on Paulson, but then again that's just me.

Mon, 10/12/2009 - 11:25 | 96496 Michael
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G20 got the secret memo or rally the dollar over night to throw a bone to the Arab oil exporting nations but lost all control by morning. The dollar's demise continues unabated.  

Mon, 10/12/2009 - 11:49 | 96528 Anonymous
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perhaps one day, when all of these self same countries whose CB's are so anti-USD live up to the reality of defending themselves without the expenditure of US$ AND lives, they can have their new reserve currency but so long as the US is expected to provide national security by means of have bases and armed forces on other countries soil as a first line of defense for them (Europe, Japan, Saudi Arabia, etc.) I would suggest they stifle.

Mon, 10/12/2009 - 12:47 | 96580 TumblingDice
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So when do all the folks who are gettng paid with USD figure out that theyve been had? The rest of the world doesnt mind since its saves them from the MAD scenario, but the people who just saw his purchasing power decrease by 20% (or whatever it is), when does he figure out that they're the ones footed with the bill?

Mon, 10/12/2009 - 15:50 | 96762 Tesla
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I think that we're pretty obviously near an inflection point when all the CBs are acting in a similar way. I'll guess that the dolar is about to run up quiete strongly

Mon, 10/12/2009 - 20:28 | 97056 Anonymous
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