This page has been archived and commenting is disabled.

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.

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 10/12/2009 - 09:58 | Link to Comment mikeyv1970
mikeyv1970's picture

Whats up with the S&P locked up? Is screwing up my $VIX and all.

-Michael

Mon, 10/12/2009 - 10:00 | Link to Comment AN0NYM0US
AN0NYM0US's picture

dollar the focus on Bloomberg TV right now

Mon, 10/12/2009 - 10:00 | Link to Comment lizzy36
lizzy36's picture

BREAKING NEWS: odd lot caused new ytd interday high on SPY.

Mon, 10/12/2009 - 10:03 | Link to Comment mikeyv1970
mikeyv1970's picture

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.

-Michael

Mon, 10/12/2009 - 10:03 | Link to Comment mikeyv1970
mikeyv1970's picture

Duplicate

Mon, 10/12/2009 - 10:07 | Link to Comment Cheeky Bastard
Cheeky Bastard's picture

A message reading " I WILL NOT OBEY !!!!!1 " showed up on HAL9000 screen.

Mon, 10/12/2009 - 10:10 | Link to Comment mikeyv1970
mikeyv1970's picture

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.

-Michael

Mon, 10/12/2009 - 10:11 | Link to Comment mikeyv1970
mikeyv1970's picture

CNBC has 1079 and looks like a feed.  Guess the Internet feed is jacked up.

-Michael

Mon, 10/12/2009 - 10:55 | Link to Comment Hephasteus
Hephasteus's picture

Routers are probably getting jacked up from all this record cold global warming.

Mon, 10/12/2009 - 10:33 | Link to Comment lizzy36
lizzy36's picture

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 | Link to Comment Gilgamesh
Gilgamesh's picture

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 | Link to Comment Hephasteus
Hephasteus's picture

LOL timmah in his IMF wheelchair.

Mon, 10/12/2009 - 10:17 | Link to Comment mdtrader
mdtrader's picture

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 | Link to Comment Anonymous
Mon, 10/12/2009 - 10:21 | Link to Comment Anonymous
Mon, 10/12/2009 - 10:23 | Link to Comment Anonymous
Mon, 10/12/2009 - 10:26 | Link to Comment AN0NYM0US
AN0NYM0US's picture

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 | Link to Comment Miles Kendig
Miles Kendig's picture

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 | Link to Comment putbuyer
putbuyer's picture
Jim Rogers "Quite Sure" Gold Will Hit $2000, Dollar Will Lose Reserve Status
Mon, 10/12/2009 - 10:37 | Link to Comment Gilgamesh
Gilgamesh's picture

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 | Link to Comment QuantumCat
QuantumCat's picture

I think Jimbo is right, but on what timeline? 

Mon, 10/12/2009 - 10:33 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

I guess the foreign central banks forgot to look at Bobby Prechter's dollar "sentiment survey".

Mon, 10/12/2009 - 14:17 | Link to Comment QuantumCat
QuantumCat's picture

"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 | Link to Comment Miles Kendig
Miles Kendig's picture

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.

Cheers.

Mon, 10/12/2009 - 10:37 | Link to Comment rhinotrader
rhinotrader's picture

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 | Link to Comment HEHEHE
HEHEHE's picture

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 | Link to Comment Miles Kendig
Miles Kendig's picture

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 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

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 | Link to Comment HEHEHE
HEHEHE's picture

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 | Link to Comment docj
docj's picture

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 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

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 | Link to Comment Gilgamesh
Gilgamesh's picture

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 | Link to Comment Anonymous
Mon, 10/12/2009 - 11:12 | Link to Comment Anonymous
Mon, 10/12/2009 - 11:21 | Link to Comment Anonymous
Mon, 10/12/2009 - 11:44 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

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 | Link to Comment Michael
Michael's picture

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 | Link to Comment Anonymous
Mon, 10/12/2009 - 12:47 | Link to Comment TumblingDice
TumblingDice's picture

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 | Link to Comment Tesla
Tesla's picture

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 | Link to Comment Anonymous
Do NOT follow this link or you will be banned from the site!