More on Dollar Shortage: It's Global

Global deflation continues to unfold as U.S. dollar credits evaporate, and the sudden dollar shortage in China is a symptom.

China Merchants Bank Financial Markets, Wan Zhao: 招行市场评论： “美元荒”是怎么回事

The recent depreciation of the RMB exchange rate, closely related to the stronger US dollar index is no big fuss, market speculation around the central parity is only a low noise.'

But the "dollar shortage" phenomenon worthy of attention, we are here mainly referring to the sharply lower US dollar against RMB swap points from the figure of the 1 -year swap points can be seen, which consists of May 16 -day high of 820 points so, down to May 24 low day 520 or so points, down rate reached 300 points. We know, BUY USD / SELL CNY swaps, essentially pledged RMB borrow dollars, therefore the fair price swap point should interest the yuan and the dollar difference, taking into account the recent stability of the RMB interest rates, the recent US dollar against RMB swap points lower, mainly with domestic dollar market about higher interest rates, that is the territory of the dollar liquidity squeeze. Why then the dollar liquidity nervous?

The central bank to intervene directly in the swap market do? I do not think so. We know that last year's " 811 after" the reform, a sharp devaluation of the renminbi is expected to heat up, strong forward exchange hedging demand, making dollar-yuan swap points quickly shot up to 2000 high point, in order to appease the market sentiment, too dispel high devaluation expectations, the market speculation that the central bank swap market BUY USD / SELL CNY operation of direct intervention and lower the swap points, I agree with the speculation. But the recent swap points for two consecutive months in the 500 - 800 range variation, the swap point level is not high at this time if customers do 1 -year US dollar financing and lock forward exchange, its overall cost even less than 1 -year RMB financing, so this swap point level, the central bank has neither the motivation to intervene directly, nor necessary.

Forward foreign exchange demand is pushing it? Data do not support. We know that customer disc forward exchange settlement and will affect the swap points, which will push forward exchange swap points, will drive down long-term foreign exchange swap points. The current devaluation of the renminbi is expected to remain mainstream, in this atmosphere, long-term settlement of the demand can not be a strong point of view forward foreign exchange from banks on the scale, currently at historic lows.

Recent "dollar shortage" is a global dollar liquidity squeeze in the domestic market of the map. I believe that the recent domestic dollar liquidity tightening, for reasons beyond the territory and abroad. On May 19, the Fed announced the April interest rate meeting minutes, the minutes biased attitude eagle, it does raise the Fed rate hike expectations. One of the Federal Reserve to raise interest rates with the Chinese central bank to raise interest rates mechanisms, the Fed adjusted market interest rates means that the increase of the minimum money market interest rate corridor, ie the overnight reverse repo rate ( ONRRP ), and to absorb market liquidity through reverse repurchase agreements, Therefore, a direct result of the Fed's rate hike is the global dollar liquidity tightened.

From USD LIBOR (1 yr), the global dollar liquidity from May 18 tightened significantly, exactly the same point in time highs of RMB swaps against the US dollar liquidity tightening in China and the US dollar. But the territory of dollar liquidity reflects more intense some may get their long-term sale of foreign exchange with the banks on 20% of the structural factors that reserve and so on. Therefore, in the case of the territory of dollar liquidity tightening, the central bank rational approach is the release of dollar liquidity in the swap market, which is today we observed phenomenon.

As for why the offshore dollar-yuan swap did not drop and instead rallied, I believe that this phenomenon is mainly due to offshore renminbi liquidity was tighter than dollar liquidity, the reasons behind that may be regulatory authorities further restricting the outflow of RMB to prevent offshore purchases of foreign exchange being used to disguise capital outflows.