Central banks around the world recently swapped their holdings in US government bonds for cash, preparing a silver bullet for the need to intervene in the foreign exchange markets and defend their currencies someday.
Foreign central banks sold $ 29 billion in US Treasuries in the week ending October 5, bringing the four-week losing streak to $ 81 billion, according to the Federal Reserve. This also marked the largest outflow recorded so far in March 2020, with foreign central bank headquarters currently dropping to $ 2.91 trillion.
With the dollar appreciating and the risk of a recession escalating, it is no surprise that central banks are starting to fill up on liquidity. From Japan to Chile, the central banks of many countries have recently intervened in the currency markets to defend their currencies.
Lou Crandall, an economist at Wrightson ICAP, said the September sell-off by foreign central banks appeared to be of an early warning nature. When foreign central banks cut their holdings in US Treasuries for four straight weeks, the cash held in the Fed’s foreign reverse repurchase agreement increased by a total of $ 61 billion at the same time.
This means foreign central banks want to increase their liquidity positions, possibly to defend their currencies, said Alex Etra, senior strategist at Exante Data.
In Southeast Asian countries, foreign exchange reserves are shrinking rapidly, reflecting asset appreciation caused by the appreciation of the US dollar and the depreciation of the Southeast Asian currency itself. For example, Malaysia and Indonesia’s foreign exchange reserves fell to their lowest level since 2020 in September and Thailand fell to a five-year low and the capital reserve was significantly reduced.
Not only emerging Asia, but also Japan’s foreign exchange reserves fell sharply: at the end of September they were 1.24 trillion US dollars, with a decrease of 54 billion US dollars compared to August. Among them, foreign stocks fell from US $ 1.04 trillion to US $ 985 billion, which means that Japan can sell these overseas securities by selling these securities in foreign currencies and use the funds obtained to intervene in the foreign exchange market. foreign exchange and prevent depreciationJPY。
