From Bloomie:
Asian nations are depleting foreign reserves as they seek to bolster their currencies while investors pull billions of dollars from the region.
Of the 10 Asian central banks with the largest reserves, six have cut their holdings this year, led by a record 18 percent reduction by Indonesia, data compiled by Bloomberg show. Their reserves are rising at the slowest pace in data going back to 2000. Holdings in Asia probably contracted once price moves are taken into account, Citigroup Inc. estimates.
…Bank Indonesia reduced its foreign-exchange reserves to an almost three-year low of $92.7 billion in July, data compiled by Bloomberg show.
…Countries in the region will “see a degree of reserves usage as they seek to stabilize their currencies during periods of heightened financial market volatility,” Sacha Tihanyi, a senior currency strategist at Scotiabank in Hong Kong, said by e-mail Aug. 22. “Indonesia and India are still highly likely to see further depletion in their reserves.”
…Indian holdings fell 4 percent this year amid outflows from the region and as the two nations sold dollars to support their currencies, data compiled by Bloomberg show.
The Asian central banks with the biggest reserves increased their holdings by 2.4 percent to $6.5 trillion this year, the smallest increase since at least 2000. The People’s Bank of China, which has 31 percent of the $11.2 trillion held in global reserves, boosted its foreign-currency holdings by 5.6 percent.
The pullback threatens currencies that have received support from Asian central banks diversifying their foreign holdings beyond U.S. dollars, such as the euro, the local dollars ofCanada and Australia, Swedish krona, Norwegian krone and South Korea’s won, according to ING Groep NV.
“We’re seeing to some extent the reverse of diversification, whereby Group of 10 currencies that previously benefited from central bank inflows are now, in a number of cases, seeing the opposite,” Callum Henderson, the global head of currencies research at Standard Chartered Plc in Singapore, said in an Aug. 22 interview.
“As reserves contract and they’re selling dollars, there probably is going to be some inclination to sell currencies like Aussie as well to keep the portfolio weightings stable,” Todd Elmer, a Singapore-based strategist at Citigroup, the second-largest currency trader after Deutsche Bank AG, said in an Aug. 22 phone interview. “We’re contracting at a pace that we haven’t seen in quite some time.”
…Investors will continue to favor diversifying their foreign reserves into currencies other than U.S. dollars, according to Scott Mather, the head of global portfolio management at Pacific Investment Management Co. The Newport Beach, California-based firm manages the $262 billion Total Return Fund (PTTRX), the world’s largest bond fund.
Diversification is “probably an irreversible trend,” Mather said in an Aug. 23 phone interview. “It may slow down short-term but it’s unlikely to reverse.”
It’s always risky to describe anything in the contemporary volatility machine as “irreversible”. But in this case, for the time being at least, I remain skeptical that this represents a new downdraft for the Aussie. It will either have to get worse, which doesn’t seem likely as US data is stinking up, or the local economy and especially house prices will have to weaken and allow further rate cuts.
The other major factor is China, where we’ll need to see more trouble. The big rises in Australian private sector bond rates were much worse when China was experiencing its credit squeeze. The local securitisation market dried up and bank CDS prices jumped well above current rates.
Don’t get me wrong, structurally the Aussie is going lower, but there are mini-cycles within the larger trend.
