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Scotiabank and Bank of America said India, Brazil, Russia and Indonesia have intervened in foreign-exchange markets, and dollar sales mean liquidating Treasuries. Ali Jalai at Scotiabank said there is a lack of buyers in the Treasury market, while selling by central banks to back up their currencies exacerbates the situation.
Developing country currencies are tumbling amid capital flight from their equity and bond markets because the Fed plans to taper. The JPMorgan Emerging Markets Currency Index’s 4-month drop through August has not been exceeded since a 10-month losing streak in 2001.
Sean Callow at Westpac Banking said that countries like a weaker currency so long as it is not generating much inflation and undermining confidence in their currency. Callow said for nations like India and Indonesia, a weaker currency will only amplify their inflation concerns, but Korea would like a slightly weaker currency.
EPFR Global says over $47 billion has left funds investing in emerging markets since May, and 2013’s net outflow stands at $7.5 billion.
Foreign reserves of the 12 biggest emerging markets, excluding China and countries with currencies whose values don’t change freely, have fallen 2 percent in 2013, the most since the 11 percent slump after the collapse of Lehman 5 years ago.
Foreign ownership of Treasuries fell 0.6% in half1, 2013 and is set for the first full-year decline in data going back to 2000 and versus 10 percent annual gains seen since 2006. The Fed surpassed China to become the biggest owner of Treasuries in 2011, Fed holdings of Treasuries totaled a record $2.03 trillion last week versus China’s holdings of $1.28 trillion and Japan’s holdings of $1.1 trillion.
Bin Gao at Bank of America said a large proportion of central bank reserves go to the fixed-income markets, so when FX reserves drop, they need to sell some of their bonds – it is hurting Treasuries already.
Stephen Jen at SLJ Macro Partners said emerging-market central banks will be under intense pressures to defend their currencies by selling their underlying Treasury holdings, possibly triggering a negative spiral between pressures on emerging markets and US Treasuries, through the emerging-market central banks’ reserves.
G-20 countries said a shift in Fed policy may prove damaging to global markets.
The median analysts forecasts yields on 10-yr Treasuries will be 3% by mid-2014 and 3.2% by the end of 2014, and versus the 3.54% average over the past decade.
Hideo Shimomura at Mitsubishi UFJ Asset Mgmt said currency reserves globally have risen 3 percent this year, and the increase will blunt the effects of dollar sales. Shimomura said some countries will have to sell Treasuries, but it has not had a big impact on the market so far.
The BIS said the US dollar is dominant and was on one side of 87 percent of all foreign-exchange trades in April.
The median economist expects the Fed to taper its monthly purchases of Treasuries and mortgage bonds by $10 billion at its September meeting.
Kit Juckes at Societe Generale said buyers of American Treasuries will be American private-sector investors going forward to a greater degree, and tapering is an exercise now in price discovery when the biggest buyers are walking away.
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