Forex News

Column-Yuan won’t be FX reserve currency if no one buys China’s bonds: McGeever

Published

6 months ago

March 28, 2023

William

Column-Yuan won't be FX reserve currency if no one buys China's bonds: McGeever

© Reuters. FILE PHOTO: An advertisement poster promoting China’s renminbi (RMB) or yuan , U.S. dollar and Euro exchange services is seen outside at foreign exchange store in Hong Kong, China August 13, 2015. REUTERS/Tyrone Siu

By Jamie McGeever

ORLANDO, Florida (Reuters) – faces significant long-term obstacles to becoming a global reserve currency of any great import, but the biggest challenge in the near term is the fact that nobody wants to buy Chinese bonds.

Foreign investors have been dumping Chinese bonds ever since Russia invaded Ukraine in February last year, wary that Beijing’s ties to Moscow could potentially expose overseas holders of Chinese assets to international sanctions.

The reversal was sudden – non-residents had poured money into Chinese debt securities almost every single month over the preceding decade – and so far, it has been sustained.

Figures through March this year compiled by macroeconomic data research firm Exante Data show that foreigners have been heavy sellers of Chinese bonds every month bar one since Russia invaded Ukraine.

“It is very hard to create a reserve currency, without attractive reserve assets. China has a problem. It wants foreigners to buy bonds but they have been selling since early 2022,” says Jens Nordvig, founder and CEO of Exante Data.

“Both the private sector and the official sector are reducing yuan exposure within their fixed income portfolios,” Nordvig adds.

Exante Data’s figures show foreign investors bought a net $558 billion of Chinese bonds between 2010 and 2021. From February last year through March this year they sold $115 billion.

DE-DOLLARIZATION?

The global ‘de-dollarization’ debate has found a new lease of life recently.

The dollar’s nominal share of global reserves is 58.35%, according to the International Monetary Fund’s currency composition of official foreign exchange reserves, or ‘Cofer’ data, the lowest since the euro’s launch in 1999.

Several countries, including Brazil and other major emerging economies in Asia and the Middle East, have called for trade in oil, commodities and other global goods to be invoiced in non-dollar currencies.

To be sure, the renminbi’s share of world FX reserves has more than doubled in the last seven years to 2.69%, according to the IMF’s Cofer data.

It has grown much faster than the yen, sterling, and currencies like the Australian and Canadian dollars and Swiss franc that are bundled together in the ‘others’ category in the Cofer data. But from a much lower base.

The nominal amount of global reserves held in renminbi was $298 billion at the end of last year, down from a peak of $337 billion 12 months earlier.

But in a pool of $12 trillion global reserves, of which nearly 80% is denominated in dollars and euros, these are very small numbers. There is a long way to go for the yuan to reach even the levels of sterling and the yen at 4.95% and 5.50%, respectively.

RESERVE STATUS

Any currency that has designs on attaining international reserve status must meet several criteria and fulfill several roles.

It should be widely accepted as a unit of reserve for central banks, an accounting unit for international trade, and a transaction currency for trading in global financial assets like equities and bonds.

Beijing has gradually allowed more institutions and central banks to enter the yuan-denominated bond market over the past two decades by relaxing rules around quotas, lock-up periods and registration requirements.

But as IIF economist Jonathan Fortun notes, it is a slow and uneven process, which will be made even slower and more uneven by the heavy selling of Chinese bonds recently.

“Any episode of large outflows concentrated in a single locale, as has been the case of China for much of last year, would be detrimental for a currency to achieve reserve status,” Fortun said.

The IIF’s capital flows data shows some minimal net inflows into China in recent months, but paints a broadly similar picture: demand for Chinese debt has evaporated.

Reluctance to own Chinese bonds comes amid growing pressure form Washington on its Group of Seven allies to impose restrictions on certain investments in China with national security implications. It didn’t make it into the final G7 communique, suggesting other G7 members are less enthusiastic.

But Washington is likely to keep pressing its allies to take a stand against what it considers Beijing’s use of “economic coercion” against other countries.

Beijing, in turn, could view this as the thin end of the wedge, effectively a call for companies, institutions and investors in some of the world’s richest nations to steer clear of China and allocate capital elsewhere.

Which is what bond investors, at least, are already doing.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Simon Cameron-Moore)

Forex News

Dollar retreats as banking support prompts relief rally

Published

6 months ago

March 28, 2023

Rohlan

Dollar retreats as banking support prompts relief rally

The U.S. dollar slipped lower in early European trade Friday and riskier currencies rallied on easing concerns about a global banking crisis.

At 04:25 ET (08:25 GMT), the , which tracks the greenback against a basket of six other currencies, traded 0.4% lower at 103.715.

The foreign exchange market has seen a relief rally after a number of large U.S. banks injected $30 billion in deposits into First Republic Bank (NYSE:), supporting this regional bank which had been caught up in the backwash of the collapse of two other smaller U.S. banks over the past week.

The move followed Credit Suisse’s (SIX:) announcement earlier on Thursday that it would borrow up to $54B from the Swiss National Bank, ensuring the embattled lender had sufficient liquidity to cope with hefty withdrawals in the wake of a number of banking scandals.

rose 0.5% to 1.0659, benefiting from the decision of the to go ahead on Thursday with its previously signaled 50-basis-point rate hike amidst the banking turmoil.

This suggested the ECB policy makers remain confident in the underlying strength of the Eurozone banking sector.

At her regular press conference, President trod a fine line between acting tough on inflation and acknowledging the need for caution amid growing signs of financial stability risks.

The final data for the Eurozone is due later in the session, and is expected to show that inflation grew 0.8% on the month in February, up 8.5% on the year.

rose 0.5% to 1.2166, soared 0.8% to 0.6708, gained 0.8% to 0.6246, while fell 0.3% to 133.32.

Japan’s government is closely coordinating with the Bank of Japan and financial authorities overseas to prevent fallout from the banking difficulties of a number of Western banks, Finance Minister Shunichi Suzuki said on Friday.

U.S. economic data will center around the release of the University of Michigan’s reading for March later in the session, which will provide a clue as to how Americans are coping with the current economic difficulties.

That said, most eyes have now moved on to next week’s Federal Reserve monetary policy , with expectations rising that the U.S. central bank could slow its aggressive rate-hike campaign in a bid to ease the stress on the financial sector.

Markets are now pricing in a nearly 90% chance that the Fed will hike by a smaller 25 basis points next week.

Forex News

Asia FX rises, dollar dips amid easing bank crisis fears

Published

6 months ago

March 28, 2023

Rohlan

Most Asian currencies rose sharply on Friday amid easing fears of a global banking crisis, while the dollar retreated as markets also bet that the Federal Reserve will soften its hawkish stance to prevent more economic pain.

was among the best performers for the day, rising nearly 0.5% as a positive outlook on the Chinese economy from Goldman Sachs also boosted sentiment. The investment bank expects China’s economy to grow 6% this year, more than government forecasts of 5%.

Economic data released this week showed that certain facets of the economy were recovering from three years of COVID lockdowns. But growth in the manufacturing sector still remained below full capacity.

The rose 0.6% and was set to add 1.4% this week, having benefited greatly from increased safe haven demand. A mild improvement in Japan’s massive also helped sentiment towards the yen, amid easing supply chain issues.

Broader Asian currencies advanced amid increased risk appetite, as fears of an imminent banking collapse were eased by several major U.S. lenders supporting First Republic Bank (NYSE:). This came after Swiss lender Credit Suisse Group AG (SIX:) scored an up to $54 billion credit facility from the Swiss National Bank to fortify liquidity levels.

The support for banks, coupled with government reassurances that the banking sector was stable, helped ease concerns over an imminent collapse in the banking system, following the failure of several U.S. banks over the past week.

The and dollar index futures retreated about 0.3% each amid bets that the Fed will taper its hawkish stance to prevent further pressure on the economy from rising interest rates.

The collapse of several U.S. banks in recent weeks was driven largely by a slump in bond prices, to which lenders such as Silicon Valley Bank were disproportionately exposed.

Markets are now pricing in a nearly 90% chance that the Fed will hike by a smaller 25 basis points next week.

Risk-heavy Southeast Asian currencies advanced on Friday, with the rising 0.6%, while the added 0.5%.

The rose 0.3% after data showed the island state’s key non-oil exports shrank slightly less than expected in February from the last year.

The rose 0.2%, also benefiting from weakness in oil markets, while the surged 0.8% after logging sharp losses over the past week.

Forex News

Dollar slips after ECB rate decision, Fed hike seen

Published

6 months ago

March 28, 2023

Rohlan

Dollar slips after ECB rate decision, Fed hike seen

NEW YORK/LONDON (Reuters) -The dollar fell and the euro rose on Thursday after the European Central Bank raised interest rates as planned despite market chaos in recent days, in a sign the Federal Reserve also will likely raise rates next week as both stay on track to tame inflation.

The two currencies stuck to a narrow range before the ECB announced a half-percentage point rate hike as promised, with markets pricing an 80.5% likelihood that the Fed will lift rates by a quarter point on March 22, CME’s FedWatch Tool showed.

U.S. and euro zone government bond yields rose as stock markets on both sides of the Atlantic rallied after an initial volatile trading reaction by markets to the ECB decision.

“The market is looking at the ECB, seeing a central bank facing market uncertainty and taking the hawkish decision that it had hinted at in earlier guidance, being driven by its inflation mandate and saying ‘the Fed might be able to follow that similar template,'” said Brian Daingerfield, head of G-10 FX strategy at NatWest Markets.

The ECB has raised rates at the fastest pace on record and the Fed at its quickest in four decades to curb inflation. Higher rates on U.S. government debt than other countries has fortified the dollar, as has a relatively strong economy.

But a rout in global markets after Silicon Valley Bank collapsed in the United States last week and a plunge in the share value of Credit Suisse this week threatened to upend the ECB’s plans to raise rates.

“If they didn’t do anything, if there was no hike, people would have been more panicked. They would immediately have started speculating what are they hiding?” said Simona Mocuta, chief economist at State Street (NYSE:) Global Advisors in Boston.

“It also gives a sense of continuity in this moment of mayhem. It’s a bit of an anchor, as policymakers should be at times like this,” she said.

The euro fell as much as 0.25% after the ECB’s decision but later reversed course, as did the dollar. The euro was up 0.38% to $1.0615 while the fell 0.258%.

Currency and other markets were broadly calmer on Thursday after Credit Suisse said it would borrow up to $54 billion from the Swiss National Bank to shore up liquidity and investor confidence.

The bank’s shares had plunged as much as 30% on Wednesday.

That stability also helped the Swiss franc to strengthen, and the dollar at one point fell more than 1% against the franc to 0.9232, reversing some of its 2.15% surge on Wednesday – the largest daily gain since 2015.

Elsewhere, the safe-haven Japanese yen remained in favor even as markets calmed a little.

The Japanese yen weakened 0.04% to 133.47 per dollar as the U.S. currency slipped further from a nearly three-month high of 137.91 it hit on March 8.

Sterling was last trading at $1.212, up 0.46% on the day.

Currency bid prices at 3:24 p.m. (1924 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct Change High Bid Low Bid

Session

Dollar index 104.3600 104.6500 -0.26% 0.841% +104.7500 +104.2000

Euro/Dollar $1.0617 $1.0579 +0.37% -0.91% +$1.0635 +$1.0552

Dollar/Yen 133.4700 133.4750 -0.01% +1.79% +133.8200 +131.7200

Euro/Yen 141.71 141.10 +0.43% +1.00% +141.9200 +139.1500

Dollar/Swiss 0.9289 0.9338 -0.52% +0.47% +0.9339 +0.9233

Sterling/Dollar $1.2122 $1.2056 +0.56% +0.25% +$1.2127 +$1.2029