Incredulous Cultists
The latest data confirming record foreign demand for US assets and a decline in official sector purchases leaves the doomsday cultists simply incredulous:
if you believe the data, almost all the financing came from private investors abroad, who bought about $114 billion of US securities. That total includes around $90 billion of long-term debt. Corporate bonds were particularly popular. Central banks only bought $4 billion. I don’t believe that.
Brad is right to highlight the limitations of the TIC data. However, given recent gains in the USD index to two year highs, a reduction in foreign official sector purchases should come as no surprise, since there is less pressure on the managed exchange rate regimes of foreign central banks. There have even been suggestions that the Bank of Japan might soon intervene in foreign exchange markets to sell the USD. I’m far from convinced that such intervention is imminent, but if the BoJ turned a net seller of USD assets, this would pose a serious challenge to the view that the US is in any meaningful sense dependent on foreign central bank purchases of USD assets.
posted on 17 November 2005 by skirchner
in Economics
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“less pressure on the managed exchange rate regimes” ...
care to back up that assertion?
tis certainly true for Japan, and for most of non-Japan Asia.
But for China? Chinese reserve accumulation over the last four quarters has hardly been small.
And what about the managed floats (in some cases dollar pegs) of the oil exporters?
Global reserve accumulation (judging from the IMF data) remains strong, and that total does not include all of the Saudis assets.
I will grant you that relative to the overall US CAD ($820 b this year), dollar reserve accumulation (probably $400b) is down. Last year the US CAD was $670b, and dollar reserve accumulation was $500 b in 04 ... so net private flows are financing a larger share of the US current account deficit. They are large enough to finance a pretty big deficit in fact—$400 b by my math. but not quite a $800b deficit.
Posted by .(JavaScript must be enabled to view this email address) on 11/19 at 01:47 PM
During previous intervention episodes by the BoJ, it was notionally financing the ENTIRE US current account deficit and then stopped completely. So we already have a good test case of what happens when there is an abrupt reversal in these foreign official sector reserve asset transactions - not very much at all.
Posted by skirchner on 11/19 at 02:38 PM
Care to bet on what would happen if the People’s bank of China stopped intervening completely? Am happy to go long RMB/ short Treasuries if you want to take the opposite side of that trade…
The BoJ stopped intervening in part because it overwhelmed the markets and folks stopped betting it would give in ... then yield differentials moved in the dollar’s favor and private Japanese investors picked up the slack. If you want to generalize from that to what would happen if China stopped intevening, feel free ...
Posted by .(JavaScript must be enabled to view this email address) on 11/19 at 03:43 PM
We have a pretty good estimate of what would happen if ALL foreign official sector purchases disappeared: 60 bps.
http://www.institutional-economics.com/index.php/section/how_important_are_foreign_official_reserve_asset_purchases
Posted by skirchner on 11/19 at 03:54 PM
If we could do a controlled experiment where all the world’s central banks stopped intervening cold turkey, i would happily give you 60 bp.
the banque de france estimated the impact on treasuries at the time of peak (recorded) central bank intervention was closer to 140 bp.
the warnock study though is good—i would note however that if you look only at official purchases of treasury securities, that understates the impact of central banks on the market. central banks’ dollar reserve accumulation ($500b per the bIS in 04) exceeds their treasury purchases—so they have a broader impact on the market. and by keeping its exchange rates undervalued and its goods cheap, China also contributes to subdued core inflation by holding down manufactured goods prices.
in any case, do you have an estimate of how much “intervention” has fallen off this year?
Posted by .(JavaScript must be enabled to view this email address) on 11/20 at 04:31 AM
Have you read Alan Kohler’s piece today?
Something’s gotta give in America
http://www.smh.com.au/news/business/somethings-gotta-give-in-america/2005/11/22/1132421665012.html
“So what’s the problem? It’s that the US dollar is overvalued and the country’s competitiveness has eroded to the point where the cash rate arbitrage will be pitifully inadequate to hold the currency. This has occurred because Asian central banks, led by China, have been buying US bonds at ridiculously low interest rates in order to keep their own currencies and improve their own competitive position.”
Posted by .(JavaScript must be enabled to view this email address) on 11/23 at 10:41 AM
Kohler is good on most things, but not on this issue.
Posted by skirchner on 11/23 at 12:10 PM
Everytime I see the words “the US dollar is overvalued” a chill runs down my spine.
I hope and pray you are right and Kohler is wrong.
Posted by .(JavaScript must be enabled to view this email address) on 11/23 at 12:15 PM