First up, from Asia Times via MENA FN, August 28:
Avalanche Alert: China May Dump Dollars When Fed Eases Rates
he US federal Reserve has a rather checkered history in Asia, particularly since the mid-1990s.
The last time the US central bank tightened with the ferocity it did in recent years was between 1994 and 1995. That doubling of short-term rates within 12 months paved the way for the 1997-98 Asian crisis as a runaway dollar rally destabilized the region's currency pegs.
Since then, the 2008“Lehman shock” that the Fed was slow to see coming and the 2013“taper tantrum” have disproportionately rocked Asian markets.
Asia also bore the brunt of the Fed's 2022-2023 tightening cycle . The dollar's surge in response to Fed Chairman Jerome Powell's rate hikes saw epic waves of capital zooming toward US assets.
Yet might the Fed's rate cuts unleash a different kind of turmoil in Asia? It could indeed if economist Stephen Jen is right.
The chief executive of Eurizon SLJ Capital thinks Chinese companies might dump roughly US$1 trillion of dollar-denominated assets as Team Powell undoes its most recent rate hike campaign.
In fact, Jen predicts something of an“avalanche” as a weakening dollar sends waves of repatriating capital China's way, upending currency markets in the process.
Granted, Jen has warned of this dollar-dumping dynamic for a couple of years now. In June 2023, for example, Jen argued that“Chinese corporates continue to hoard dollars. The total stock of dollars held by Chinese entities continues to rise. The dollar's high carry may at present seem enticing to Chinese entities, but this configuration is fundamentally unstable.”....
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And from Bloomberg via MSN, August 30:
Goldman Pushes Back Against Jen’s Yuan ‘Avalanche’ Warning
Some investors are overestimating the stockpile of Chinese money that could be converted back into yuan, as firms may not yet be ready to abandon dollar holdings, according to Goldman Sachs Group Inc.
US assets remain attractive to Chinese firms, given the still-large interest rate differentials between the two countries and weak domestic sentiment, analysts including Xinquan Chen wrote in a note Friday. The team calculated that around $400 billion has been hoarded by exporters from mid-2022, a figure below some market estimates.
The yuan extended its recent advance Friday to levels unseen in more than a year, as traders mulled signs of corporate buying amid broad weakness in the greenback. The offshore yuan has surged around 2% in August to erase its losses for the year and is now up about 0.7% in 2024 against the faltering greenback.
Investors have been trying to gauge just how big Chinese companies’ foreign stockpile may be and how much is likely to be repatriated, further fueling the yuan rally. Eurizon SLJ Capital’s Stephen Jen suggested a potential inflow of $1 trillion, half the hoard he estimated has been built up since the pandemic, in a recent interview with Bloomberg News. Barclays Plc’s Lemon Zhang put the figure at a maximum of $100 to $200 billion....
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The yuan is not included in the U.S. dollar index. If it were, the DXY would be closer to dropping below 100, 101.73 last. Understanding index construction: very important, and not just for inductees of the Indexing Hall of Fame (more properly the William F. Sharpe Indexing Lifetime Achievement Award).