Now Comes Quantitative Tightening(QT)——A Red Dagger Pointed At Global ‘Risk-On’

One narrative we’ve pushed quite hard this week is the idea that China’s persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves. Of course this week’s posts hardly represent the first time we’ve touched on the issue of FX reserve liquidation and its implications for global finance. Here, for those curious, are links to previous discussions:

And so on and so forth.

In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year. 

In the end, the estimated size of the RMB carry trade could mean that before it’s all over, China will liquidate as much as $1 trillion in US paper, which, as we noted on Thursday evening, would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields. 

And don’t forget, this is just China. Should EMs continue to face pressure on their currencies (and there’s every reason to believe that they will), you could see substantial drawdowns there too. Meanwhile, all of this mirrors the petrodollar unwind. That is, it all comes back to the notion of recycling USDs into USD assets by the trillions

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