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Some say China is behind the dollar’s weakness
Published: Feb 19, 2016 10:31 a.m. ET
The dollar’s weakness against the euro and yen over the last two months has frustrated traders as well as central bankers in Europe and Japan who’ve watched their currencies strengthen despite looser monetary policy.
Many market strategists have blamed the currencies’ resilience on investors seeking safe harbor from turbulent global markets. But others believe it’s an inadvertent consequence of a mysterious policy shift by one of the U.S.’s largest economic rivals: China.
In recent months, the People’s Bank of China has been rebalancing its massive foreign currency reserves, which were worth $3.231 trillion at the end of January. To do this, the PBOC, the Chinese central bank, has likely sold dollars and dollar-denominated assets like U.S. Treasurys in favor of government debt from eurozone countries and Japan, said Douglas Borthwick, head of currency trading at Chapdelaine & Co.
The necessary purchase of euros EURUSD, +0.1980% yen USDJPY, -0.56% needed to fund these transactions has supported both currencies against the dollar, even as the U.S. currency strengthened against other rivals in the G-10, Borthwick said.
Since mid-December, the euro has risen 1.1% against the dollar and the yen has gained 6.7%. Meanwhile, the dollar has strengthened by 1% against the yuanUSDCNY, +0.1013% in China’s onshore market.
China’s rebalancing follows a decision in mid-December to begin measuring the yuan’s value against a trade-weighted basket. Previously, the yuan was primarily viewed against the dollar.
Borthwick said recent communiqués from China suggest the central bank is increasingly concerned with managing the value of the yuan, also known as the renminbi, against the basket, and not against the dollar, which necessitated the shifting reserves.
A long time coming
Chinese officials have been advocating for such as shift for at least five years.
On June 19, 2010, Yu Yongding, a former adviser to the People’s Bank of China, suggested in the China Securities Journal the country should reduce its dollar holdings to protect itself from a sharp depreciation in the U.S. currency.
But Chinese officials have been more concerned with the recent surge in the dollar’s value since 2011, which has dragged the yuan higher, weighing on the competitiveness of Chinese exporters.
“Over the last five years, they’ve been seeking to diversify their reserves in a more prudent manner, Borthwick said. “Either they would base their reserves on the SDR or on a trade weighting. And by the looks of it, they’ve gone with the trade weighting.”
According to China’s foreign-exchange authority, the largest constituents of the index are the U.S. dollar, at 26.4%, the euro at 21.4% and the yen at 14.7%.
It also includes the British pound, Hong Kong dollar, Australian dollar, New Zealand dollar, Singapore dollar, Swiss franc, Canadian dollar, Malaysian ringgit, Russian ruble and Thai baht.
China doesn’t publish details about the composition of its foreign reserves, and its process for managing the value of the yuan remains opaque. But China’s reserves declined by a total of more than $200 billion in January and December, according to official data, which Borthwick said supports the idea that China has been swapping Treasurys for assets denominated in other currencies.
Don’t believe the hype
Investors are worried that capital flight and China’s efforts to fend off speculators will drain reserves, possibly forcing the country to allow its currency to depreciate sharply. But a report published earlier this month by Gavekal Dragonomics argued that claims of capital flight from the Chinese economy have been overexaggerated.
The report, published earlier this month, showed that domestic renminbi deposits actually rose in 2015. Household deposits rose by 10% and corporate deposits rose by 14%.
“There are few signs that people are withdrawing renminbi and switching into dollars on a large scale,” said Chen Long, the China economist at Gavekal and the report’s author.
Buying by the PBOC helped turn the yield on the 10-year Japanese government bond negative earlier this month, and it’s also one of the reasons why the yen has remained buoyant, despite the Bank of Japan’s efforts to weaken it, Borthwick said.
Indeed, speculation that China has been selling Treasurys en masse has intensified as of late.
The dollar has been relatively stable against most of its G-10 rivals over the last two months, as the chart below shows. It illustrates the buck’s value versus the Canadian dollar, New Zealand dollar, Australian dollar, Swedish krona, Norwegian krone, Swiss franc, British pound, euro and yen.
Large investors and market strategists alike believe the yuan will depreciate against the dollar as China struggles with slowing economic growth and the fallout from nonperforming loans.
Kyle Bass, founder of hedge fund Hayman Capital Management, said he’s placed a massive bet against the yuan on the expectation that China will need to choose between deleveraging its financial system and defending its currency from speculators.
But Borthwick believes the yuan’s value relative to the buck will be more or less stable this year as policy makers shift their focus to the trade-weighted basket.
“The idea that there’s immense capital flight leaving China is misplaced,” Borthwick said.
Some say China is behind the dollar’s weakness - MarketWatch
Published: Feb 19, 2016 10:31 a.m. ET
The dollar’s weakness against the euro and yen over the last two months has frustrated traders as well as central bankers in Europe and Japan who’ve watched their currencies strengthen despite looser monetary policy.
Many market strategists have blamed the currencies’ resilience on investors seeking safe harbor from turbulent global markets. But others believe it’s an inadvertent consequence of a mysterious policy shift by one of the U.S.’s largest economic rivals: China.
In recent months, the People’s Bank of China has been rebalancing its massive foreign currency reserves, which were worth $3.231 trillion at the end of January. To do this, the PBOC, the Chinese central bank, has likely sold dollars and dollar-denominated assets like U.S. Treasurys in favor of government debt from eurozone countries and Japan, said Douglas Borthwick, head of currency trading at Chapdelaine & Co.
The necessary purchase of euros EURUSD, +0.1980% yen USDJPY, -0.56% needed to fund these transactions has supported both currencies against the dollar, even as the U.S. currency strengthened against other rivals in the G-10, Borthwick said.
Since mid-December, the euro has risen 1.1% against the dollar and the yen has gained 6.7%. Meanwhile, the dollar has strengthened by 1% against the yuanUSDCNY, +0.1013% in China’s onshore market.
China’s rebalancing follows a decision in mid-December to begin measuring the yuan’s value against a trade-weighted basket. Previously, the yuan was primarily viewed against the dollar.
Borthwick said recent communiqués from China suggest the central bank is increasingly concerned with managing the value of the yuan, also known as the renminbi, against the basket, and not against the dollar, which necessitated the shifting reserves.
A long time coming
Chinese officials have been advocating for such as shift for at least five years.
On June 19, 2010, Yu Yongding, a former adviser to the People’s Bank of China, suggested in the China Securities Journal the country should reduce its dollar holdings to protect itself from a sharp depreciation in the U.S. currency.
But Chinese officials have been more concerned with the recent surge in the dollar’s value since 2011, which has dragged the yuan higher, weighing on the competitiveness of Chinese exporters.
“Over the last five years, they’ve been seeking to diversify their reserves in a more prudent manner, Borthwick said. “Either they would base their reserves on the SDR or on a trade weighting. And by the looks of it, they’ve gone with the trade weighting.”
According to China’s foreign-exchange authority, the largest constituents of the index are the U.S. dollar, at 26.4%, the euro at 21.4% and the yen at 14.7%.
It also includes the British pound, Hong Kong dollar, Australian dollar, New Zealand dollar, Singapore dollar, Swiss franc, Canadian dollar, Malaysian ringgit, Russian ruble and Thai baht.
China doesn’t publish details about the composition of its foreign reserves, and its process for managing the value of the yuan remains opaque. But China’s reserves declined by a total of more than $200 billion in January and December, according to official data, which Borthwick said supports the idea that China has been swapping Treasurys for assets denominated in other currencies.
Don’t believe the hype
Investors are worried that capital flight and China’s efforts to fend off speculators will drain reserves, possibly forcing the country to allow its currency to depreciate sharply. But a report published earlier this month by Gavekal Dragonomics argued that claims of capital flight from the Chinese economy have been overexaggerated.
The report, published earlier this month, showed that domestic renminbi deposits actually rose in 2015. Household deposits rose by 10% and corporate deposits rose by 14%.
“There are few signs that people are withdrawing renminbi and switching into dollars on a large scale,” said Chen Long, the China economist at Gavekal and the report’s author.
Buying by the PBOC helped turn the yield on the 10-year Japanese government bond negative earlier this month, and it’s also one of the reasons why the yen has remained buoyant, despite the Bank of Japan’s efforts to weaken it, Borthwick said.
Indeed, speculation that China has been selling Treasurys en masse has intensified as of late.
The dollar has been relatively stable against most of its G-10 rivals over the last two months, as the chart below shows. It illustrates the buck’s value versus the Canadian dollar, New Zealand dollar, Australian dollar, Swedish krona, Norwegian krone, Swiss franc, British pound, euro and yen.
Large investors and market strategists alike believe the yuan will depreciate against the dollar as China struggles with slowing economic growth and the fallout from nonperforming loans.
Kyle Bass, founder of hedge fund Hayman Capital Management, said he’s placed a massive bet against the yuan on the expectation that China will need to choose between deleveraging its financial system and defending its currency from speculators.
But Borthwick believes the yuan’s value relative to the buck will be more or less stable this year as policy makers shift their focus to the trade-weighted basket.
“The idea that there’s immense capital flight leaving China is misplaced,” Borthwick said.
Some say China is behind the dollar’s weakness - MarketWatch
