Global Markets Research
Foreign Exchange: Strategy
15, April 2014
Asia ex-Japan:CNY – How Much Has PBOC Re-cycled Its USD Buying?
The “heavy lifting” by the Peoples Bank of China (PBoC) continues with the central bank eyeing 6.25 in the short term.
USD buying is also being reallocated to regional currencies, leading to pronounced divergence in currency performance.
We estimate the PBoC has recycled around USD 150-300bn in Q1, significantly above what the reserve data suggests.
PBoC heavy lifting continues, albeit more subdued
The “heavy lifting” by the Peoples Bank of China (PBoC) continues. In the past eight sessions, the central bank has kept the midpoint around 6.15 levels consistently despite a sluggish USD performance. More importantly, the PBoC’s intraday USD buying continues to lift spot around 1% above its midpoint. While subsiding slightly from its peak just after the band widening, we believe USD re-cycling is likely to persist, capping any USD rebound in the short term. On that note, we believe part of USD buying is also being re allocate to regional currencies leading to more pronounced divergence in currency performance in the region.
FX reserve data is “post mortem” snapshot
China’s FX reserves expanded by USD 129 bn in the first quarter of 2014, its smallest increase in three quarters. However, FX reserve data represents just a “post-mortem” snapshot of USD accumulation by central banks on a stock basis. In other words, it doesn’t capture how much central banks re-cycle their USD buying on a flow basis. Furthermore, China’s reserve data is typically difficult to interpret due to the opaque nature of currency composition, which subsequently makes adjustment for currency fluctuation a challenging task.
In that regard, EUR/USD was up by roughly 1.6% in Q4 2013, compared with just 0.20% in Q1 2014. As USD is estimated to constitute around 60-70% of China’s FX reserves, a stronger EUR against USD leads in theory faster accumulation in FX reserves in USD terms just through translations gains. Also, given the enormous size of the FX reserves, interest payments on these overseas investments are estimated to be an average of USD 30bn – 40bnon a quarterly basis. Last but not least, trade surplus and foreign direct investments need to be adjusted to arrive at a more accurate gauge of additional USD buying by the PBoC to lift USD/CNY.
How much has PBoC re-cycled its USD buying?
We are inclined to look more closely at PBoC’s open market operations (OMO’s) for a more accurate picture of USD recycling. In that regard, the PBoC withdrew, since the beginning of the year, a total of CNY 1 trillion (USD 150bn) through selling repos, whereas, in the meantime, short-term interest rates (SHIBOR) fell on average by 0.50 – 1%. Thus despite negligible translation gains in Q1, the PBoc could have recycled anywhere from USD150 -300bn during the period by our estimates, significantly more than the FX reserve data suggests.