Global Central Banks FX Reserves Rising: Implications For FX

 

PBoc Reserves Rise Again in July

The latest data shows that PBoC FX reserves rose again in July, reaching around $3.1trln. Central banks in developed economies have been steadily adding to their reserves, which is a trend likely to develop further.

Indeed, a downward trend in USD could see self-reinforcing support from central banks, particularly as the EUR percentage share of global FX reserves has been particularly low over recent quarters. As such, central banks could start to add to their EUR FX reserves even if the total amount of reserves doesn’t grow.

Chinese Reserves Hit Highest Levels Since 2014

The reported $23.9bln increase in China’s reserve holdings over July was slightly above analyst estimate and despite being down around 4% year on year, reserves have been steadily increased over the last six months. Data also shows that three of there last four monthly increases have been the biggest increases since early 2014 reflecting that after two years of consistent depletion, FX reserves are now being restocked.

Key Domestic Factor

In terms of  domestic factors fueling this trend, one is clearly the movement in the exchange rate with CNY now trading around 6.70 against USD, marking its strongest level since October 2016. Alongside this move, concerns about a sustained decline in the currency have now largely subsided

CNY looks to trade on a relatively stable basis over the short/medium term horizon with the US and China preparing for President Trump’s visit to the country later this year. Markets also await the 19th national congress and the US Treasury’s semi-annual review of global FX and trade policies.

CNY Effective Trading Band Increasing?

Another area to highlight is the growing speculation surrounding a possible increase in CNY’s effective trading band. Indeed, the journal of the Chinese Securities this week noted the “yuan is expected to increase its two-way fluctuation in the near term”.  Further strength in CNY will create more scope for China to further build its FX reserves over the coming months.