Bear Take: Reserve and Currency Rebound Weak

Reuters: China July FX reserves unexpectedly hit 9-month high on boost from weak dollar
ZH: China's Reserves Continue To Decline As Capital Outflows Accelerate, "Outbound Travel Spending" Surges
using a separate gauge compiled by China's SAFE which tracks onshore FX settlement as well as cross-border RMB flows, shows something vastly different: as calculated by Goldman, China has not had a single month of FX inflows since its mid-2015 Yuan devaluation
The U.S. Dollar fell 10 percent from its recent high in December 2016, it fell for 5 consecutive months into July. Chinese FX reserves have rebounded 3 percent from the January low, CNYUSD rebounded 3 percent from its December 2016 low. The yuan exhibits very mild strength amid a very weak period for the U.S. dollar. If I am correct and the U.S. Dollar Index still has a new high ahead of it, the past seven months of yuan appreciation and reserve growth will offset one month of losses during the next bear move.


  1. Curious to know why you think the dollar has a new high ahead of it. Hard to see that with ECB tapering, BOC tightening, etc

    1. 1. I agree with Jeffrey Snider and others who see a structural shortage of US dollars (in the most expansive sense of all forms of USD credit such as eurodollars and derivatives) Also, the global financial system is ultimately dollar credit. Global tightening is bullish on the reserve currency.

      2. The analog still lines up reasonably well, and it times to 1998-1999. The euro would be launching soon, tech stocks led the market, commodities had taken a beating. Similar conditions to today. There's not a long enough history because the dollar has only floated for 44 years and a full cycle seems to last roughly 18 years, putting the next peak as late as 2019. This is the easiest to falsify too: if the chart breaks down that would be a major strike against a new high.

      3. The U.S. is ahead of Europe on monetary tightening and jumped ahead in political change (as did UK) in 2016. Trump/Brexit (volatility) is priced in; people seem to think Europe dodged the political bullet. Yet 5-Star, Northern League and Forza Italia still combine for more than 50% in polls amid a rebound in European social mood. I suspect the German election will be the peak with Merkel winning re-election.

      4. Developed foreign stocks are beating U.S. stocks only because dollar weakened, back out the dollar and foreign stocks are still underperforming. Previous shifts in leadership have come at market tops and bottoms. If a turn is coming, this will be a stock market top. The dollar rallies in recessions and bear markets.

      5. On balance, I expect initial Trump policies will be dollar bullish. The pipelines slashed transportation costs, boosting domestic oil production. Repatriation of foreign cash looks likely. Trade renegotiation will cut trade deficit.

      6. Related to 1, the current bounce in economic activity is probably another false dawn. I don't see anything that jumps out other than the stock market and commodity prices. Most of the bounce in the past 9 months was in soft data. Lending (TOTLL) growth is slowing. The commodity bounce was most likely driven by Chinese credit.