Last week, the world was introduced to what Deutsche Bank has branded "quantitative tightening [6]" or, in layman’s terms, "reverse QE."
In short, what began late last year with the death of the petrodollar and culminated last month with China’s massive UST liquidation can be broadly conceptualized as the end of the great EM USD asset accumulation or, put differently, as the (black?) swan song for the era of emerging market FX reserve hoarding that has for years served as a source of liquidity for global markets and kept a bid under assets like USTs.
We - as well as Citi, SocGen, and now Deutsche Bank - have endeavored to speculate on what hundreds of billions (if not trillions) in EM FX reserve liquidation may mean for UST yields (see here [7], for instance), but if you’re looking for other ways to trade QT, Deutsche Bank has another idea and on that note we present the following graphs along and commentary from DB, with the caveat that one should always beware of mistaking correlation for causation.
[8]
[9]
From Deutsche Bank:
The fact that two thirds of global reserves are held in dollars means that a sell-off should be bullish USD against other reserve currencies. This is because as central banks prop up their currencies against the dollar, they also sell other reserve currencies against the USD so as to keep their FX allocations constant. Indeed, fluctuations in EUR/USD are tightly correlated with changes in global reserves (Figure 25), though this correlation naturally captures causality in both directions.
