Levy-Sergio Mutemba

FX experts from Morgan Stanley minimize the relation between US Treasury sell-off yesterday, which sent yields up above 2.59%, and reports the same day that China may be considering US Treasuries less attractive.

“The debate on China’s holdings of US Treasuries seems overblown to us”, explain Morgan Stanley’s strategists Hans W Redeker, Sheena Shah and Gek Teng Khoo in their FX Pulse published today.

Basing their assumptions on the Treasury International Capital (TIC) Data, these calculate that China’s holdings (private and public) of US Treasury relative to the size of China’s total FX reserves seem to fluctuate between 38% and 44%, with the latest print coming in at 42%.

“In June 2017, there had been a headline ‘China Ready to Buy More Treasuries as Yuan Stabilizes’. Indeed, in 2017, estimates of China’s holdings of Treasury holdings increased by about 10% (TIC data), but this did not prevent the DXY from declining 9.9% over the course of the year”, say the US bank’s experts.

Besides FX reserves reallocation driving the FX trend, Morgan Stanley underlines the assessment of global economic strength and its impact of global capital demand. “An environment of rising leverage, investment and international debt issuance activity does see USD weakness. The anti-cyclical behaviour of USD is due to its reserve and implicitly its funding currency status.”

CNY gained more than 6,7% vs USD in the last 12 months (as of 11 January 2018)

DXY vs EURUSD vs CNYUSD

Source: Yahoo Finance. Green line = EUR/USD   Dark line = CNY/USD   Blue line = Dollar Index (DXY)

In today’s Asia trading session, Reuters reported that yesterday’s reports according to which China might be considering US Treasuries less attractive may be quoting the wrong information source, according to an official statement by State Administration of Foreign Exchange (SAFE). “The Reuters story caused a further bid to Treasuries and the US dollar, with bonds more than reversing yesterday’s negative price action”, observe Morgan Stanley’s strategists.

Who add that price action in CNH/CNY markets has been relatively benign since the announcement of the removal of the counter-cyclical factor, with RMB still trading below pre-announcement levels. “We reiterate that the model estimates for RMB have been tracking increasingly closer to actual fixing outcomes, indicating that the counter-cyclical factor has indeed been reduced”, writes Morgan Stanley.

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