November 6, 2013, 11:55 AM ET
Global Central Banks Seek Shelter From Fed Tapering
By Anjani Trivedi
South Africa’s central bank is entering new territory, diversifying its foreign-exchange reserves by buying assets denominated in currencies such as the South Korean won and Australian and New Zealand dollars.
Daniel Mminele, deputy governor of the South African Reserve Bank, said this week that the bank is “acutely aware of the risks” of the U.S. Federal Reserve winding down its monetary stimulus and had decided to protect itself against the higher U.S. Treasury yields that are expected to result.
The South African central bank isn’t alone. Others are seeking to defend themselves against exposure to the U.S. dollar and euro, amid economic uncertainty and the Fed’s intention to begin winding down its stimulus, which is expected either later this year or early next year. Yields and prices move in opposite directions.
Foreign holdings of Treasurys fell by US$128 billion over five consecutive months to August, with Asian countries shedding more than US$70 billion in U.S. government bonds year to date, according to the latest data from the U.S. Treasury Department.
Analysts say they expect this trend to continue.
“From that point of view, it makes sense for reserve managers to try and reduce exposure [to Treasurys]. If yields are to rise, that will reduce the valuations of their portfolios,” said Khoon Goh, senior currency strategist at Australia & New Zealand Banking Group in Singapore.
Central banks in developing and emerging markets have also cut their allocations to the euro, data from the International Monetary Fund shows. Allocation of reserves by these banks to the euro declined from 28.5% in the second quarter of 2011 to 23.8% as of the second quarter of this year.
Instead, central banks and sovereign wealth funds are looking to the Korean won and the Australian, New Zealand and Canadian dollars given the countries’ investment-grade credit ratings and strong economic fundamentals.
Foreign holdings of Korean government debt have jumped 8% this year to 98 trillion won (US$92 billion), according to South Korea’s Financial Supervisory Service, although the share of foreign holdings remains well below levels seen in most other markets in Asia. Central banks in emerging and developing markets now hold 1.8% of their reserves in Australian dollars and 2.1% in Canadian dollars, according to IMF data.
Like other emerging markets, South Africa saw heavy fund outflows this past summer due to expectations that the Fed would soon begin withdrawing its monetary stimulus. The rand fell 10% and the nation’s foreign-exchange reserves dropped by 5%. The country has been plagued by a persistent current-account deficit, one of the largest among emerging markets.
Foreign exchange accounts for more than 80% of South Africa’s official reserves, which have fallen 3% to US$50 billion since the beginning of the year. Reserves act as buffers against currency shocks and South Africa isn’t adequately cushioned, Goldman Sachs said in a report on Tuesday. While emerging markets’ foreign-exchange reserves total an average of 21.9% of their gross domestic product, in South Africa the total is 11.4%.
Still, the markets for these alternate currencies such as the won are not as big and liquid as those for the dollar and yen, and South Africa’s diversification could have unintended and unpleasant consequences, investors say.
“Increasing uncertainty over the direction of the major developed world currencies over the past three years has contributed to bouts of sharp and sudden movements in smaller, less-liquid currency markets,” said Robert Abad, an emerging-markets fixed-income portfolio manager at Western Asset, a subsidiary of Legg Mason Global Investment Management, which manages $656 billion.
“Given this dynamic, a country with current-account vulnerabilities, such as South Africa, should focus on maintaining sizable and highly liquid foreign currency reserves in the event of unanticipated speculative pressure on the exchange rate.”
The South African Reserve Bank’s Mr. Mminele said the bank would also invest in new asset classes such as covered bonds, mortgage-backed securities and emerging-market local-currency debt and equities “to mitigate the potentially negative impact of rising bond yields on the reserves” and for portfolio management.
0 comments:
Publicar un comentario