Central banks around the world have been exchanging their holdings of U.S. government bonds for cash recently, preparing a silver bullet for the need to intervene in foreign exchange markets and defend their currencies one day.
Foreign central banks sold a total of $29 billion in U.S. Treasuries in the week ended Oct. 5, bringing the four-week losing streak to $81 billion, according to the Federal Reserve. This also marked the largest outflow so far in March 2020, with the headquarters of foreign central banks currently down to $2.91 trillion.
With the dollar appreciating and the risk of a recession escalating, it’s no surprise that central banks are starting to fill up with cash on hand. Central banks in many countries, from Japan to Chile, have recently intervened in 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 of U.S. Treasuries for four weeks in a row, cash held in the Fed’s foreign reverse repurchase agreement rose by a total of $61 billion at the same time.
That means foreign central banks want to increase their cash positions, possibly to defend their own currencies, said Alex Etra, senior strategist at Exante Data.
In Southeast Asian countries, foreign exchange reserves are shrinking rapidly, reflecting the revaluation of assets caused by the appreciation of the US dollar and the depreciation of the currency of Southeast Asia itself. For example, the foreign exchange reserves of Malaysia and Indonesia fell to the lowest level since 2020 in September, and Thailand fell to a five-year low, and the capital buffer was significantly reduced.
Not only emerging Asia, but Japan’s foreign exchange reserves have also shrunk sharply. As of the end of September, it was 1.24 trillion US dollars, a decrease of 54 billion US dollars from August. Among them, foreign securities fell from 1.04 trillion US dollars to 985 billion US dollars, which means that Japan may sell these foreign securities by selling these foreign currency. securities, and use the funds obtained to intervene in the foreign exchange market and prevent depreciationJPY。
