As the U.S. dollar continues to strengthen, other major non-U.S. currencies have depreciated to varying degrees, and many central banks have launched a "currency defense war". In order to replenish the "ammunition" of foreign exchange reserves for the need to intervene in the foreign exchange market, global central banks began to sell US bonds.
Global central banks set off a wave of U.S. bond selling
Federal Reserve data show that global central banks sold as much as $29 billion in U.S. Treasuries last week, and the amount sold in the past four weeks reached $81 billion, the largest monthly sell-off since the outbreak of the epidemic in March 2020. Overall, U.S. bond holdings have declined. to $2.91 trillion.
Still, Wrightson ICAP economists noted that the massive sell-off by global central banks in September appeared to be more of a precautionary measure.
At present, the US dollar has risen to a 20-year high, and the risk of economic recession is rising. Central banks have begun to intervene in the foreign exchange market and directly sell the US dollar to support their currencies.
As the holdings of U.S. Treasuries by other central banks around the world have declined, the scale of cash deposited by central banks in the Fed’s reverse repurchase agreements has continued to increase. In the four weeks of the massive sell-off in U.S. Treasuries, cash rose by $61 billion. This suggests that other central banks around the world want to increase their cash positions to defend their currencies.
Many foreign reserves shrink
The U.S. dollar has strengthened strongly, causing countries to shrink their U.S. dollar-denominated foreign exchange reserves.
According to data released by the State Administration of Foreign Exchange a few days ago, as of the end of September 2022, my country's foreign exchange reserves stood at US$3,029 billion, a drop of US$25.9 billion, or 0.85%, from the end of August.
Zhou Maohua, a macro researcher at the Financial Market Department of China Everbright Bank, explained that it is mainly affected by valuation factors. In addition to the shrinking of foreign reserves, the global financial market has fluctuated, and financial assets such as US stocks and US bonds have continued to fall.
Foreign reserves have been falling across Southeast Asia, with Malaysia and Indonesia dropping to their lowest level in 2020 in September, while Thailand's fell to its lowest level in five years.
According to the latest data from the Bank of Korea, South Korea's foreign exchange reserves fell by the most in nearly 14 years in September as foreign exchange reserves were used to support the won exchange rate: as of the end of September, foreign exchange reserves were 416.77 billion U.S. dollars, compared with 436.43 billion U.S. dollars at the end of the previous month.
Japan has also paid a heavy price for its intervention. According to data from the Japanese Ministry of Finance, as of the end of September, Japan's foreign exchange reserves were US$1.24 trillion, a sharp drop of US$54 billion from the previous month, the largest on record. In addition, Japan began selling assets to support foreign exchange intervention, and its foreign securities holdings fell from $1.04 trillion to $985 billion at the end of August.
Even global foreign exchange reserves are falling at the fastest rate ever. World foreign exchange reserves have fallen by about $1 trillion (7.8%) this year to $12 trillion. The decline in foreign reserves also reflects pressure in money markets, which is forcing central banks in a growing number of countries to use their own special funds to avoid devaluation of their currencies.
How will the RMB go?
Then, many foreign trade people are curious about the next exchange rate trend. It is reported that under the influence of the strong dollar, the RMB exchange rate fell below the lows of 2019 and 2020 in September. To stabilize expectations, a number of policies were introduced in September.
CICC predicts that the exchange rate range of the RMB against the US dollar in October will be 7.00-7.25, and the one-month pivot will be 7.10.
The basis for this judgment is that, first of all, the policy will further support the economy. In the third-quarter monetary policy meeting announced by the central bank at the end of September, the judgment of "triple pressure" was still continued, and stable growth was still the primary goal. From October 1, the interest rate of the first personal housing provident fund loan will be lowered by 0.15 percentage points, and the interest rates of less than 5 years (including 5 years) and more than 5 years will be adjusted to 2.6% and 3.1% respectively.
This will help reduce the repayment pressure of the first home, which can boost the real estate market to a certain extent, and in turn, can stabilize the economy to a certain extent.
Secondly, the cross-border balance of payments was stable in September. In terms of the current balance of payments, although the growth rate of exports slowed down in September, the trade balance remained at a high level. In general, despite facing certain short-term capital outflow pressure, after considering the trade surplus, China's cross-border receipts and payments are still stable, which is also an important reason for the good resilience of the RMB exchange rate.
Finally, considering the current uncertainties in the international situation, the RMB exchange rate will still be affected by external factors such as the U.S. dollar index, but considering that the effect of domestic economic stabilization policies will gradually appear, in line with the previous series of policies of the central bank to stabilize expectations , the volatility of the RMB exchange rate will be less than that of other non-US currencies.