The collapse of the currency pegs .. bet for new investors

2702 2016
Action will not last forever

Salt question asked in the early of this year is: How long can such countries as China, Saudi Arabia and others to continue to rely on currency reserves to spare their currencies strong and a sharp drop in value? The global economy is showing new signs of weakness and cause the collapse of commodity prices in undermining the budgets of many countries, investors are betting that the currency is witnessing the biggest weakness and the end to tie the Saudi riyal to the dollar.

Analysts are divided over whether traders or central banks that will prevail in the end, but states Tstantvd reserves to maintain the existing foreign exchange policy, a strategy thought the likes of Bill Akman and other hedge funds that they can not continue endlessly.

Roger Blitz- translation and preparation of the gift of faith -
There are two main objectives for the use of foreign currency reserves, countries are adopting and the accumulation of currency reserves for troubled and crisis periods, to deal with «Lehman happened», says Charles St. Arnaud strategist specialist foreign exchange at Nomura, and to improve the liquidity flow and ensure that there is liquidity in the market .

The other goal is to close the gap between the economic fundamentals of the country and site of its currency. It depends on what you are trying to fight it, says St. Arnaud. Central banks have used large amounts of foreign currency reserves, but it is difficult to address the essential factors. The problem with the use of reserves is that they undermine market confidence in the user.

A position of weakness in secret
As Kate says Jakes of Societe Generale Bank: If all they mean is that it was just Sam force you can not use it, they are the authorized Shield liar.

He says Oip Manding, who previously worked at the International Monetary Fund, is currently in New Sparta Asset Management Fund that countries that built their financial reserves from a position of strength now hesitate to use them in a position of weakness. They do not want to validate the market perception of being in a position of weakness.

As he says, the Manding art appreciation intervention order. He added: The question is how to get a balance in its exchange rate in an orderly manner. You can use the reserves in a manner undeclared, without letting the market know what is the preferred level has.

Stunning drop unexpectedly
China, which has about one-third of the reserves in the world, exhausted and nearly $ 800 billion of its shares in the past 18 months. And it forced the weakness in the Saudi oil prices to resort to its reserves, which fell to $ 100 billion last year compared to 2014, which led to the high cost of futures prices in dollar peg.

In the case of Saudi Arabia, which depends on imported goods, is to maintain stable exchange rates is important, according to Arup Chatterjee of Barclays Bank says. For China, it is important for her to address the problem of out of capital.

He adds: The fact that China deplete large amounts of reserves is a problem. They should allow the exchange rate to help stabilize the situation, but they are very reluctant to do so.

The era of the accumulation of foreign reserves in emerging countries began to decline, led by China. According to what he says George Saraveloz, Deutsche Bank, then if the country maintained the attrition rate, by the end of the year could fall world's reserves to $ 10 trillion, lower by $ 4 trillion from the peak of 2015. Such a decline can be «astonishing», he says.

It may be the decline in January, less than expected, and China still has reserves worth $ 3.2 trillion.

However, there are two sources of concern, says Peter Kinsella, strategist for emerging markets at Commerzbank Bank Bank. First, it may turn out that the January number was greater when it detects interference in the futures markets. Second, China must maintain sufficient reserves to meet the needs of such cover imports, and therefore, the amount available for intervention in the currency market is never close to $ 3.2 trillion.

Strategists specialists also began in the foreign exchange rates also question whether Japan, second only to China among the biggest holders of cash reserves in the world worth $ 1.3 trillion, may intervene directly in the currency market for the first time in five years. It was a sudden decision taken last month on negative interest rates failed to halt the rise of the yen, causing a lot of concern for the companies.

Says David Bloom, a strategist for currencies at HSBC Bank that the Bank of Japan may reconsider the subject of direct intervention in the currency market as an option, just as it was considered his Swiss counterpart that it is necessary to set a minimum value of the franc against the euro in 2011 to stop the currency higher.

However, due to the yen denominated undervalued, it would be difficult to justify the measure, and may end in failure eventually, says Bloom.

Central banks are involved in a game of daring and defiance with market participants such as Akman. But for how long it will continue to use reserves to support the currency pegs?

Says Daniel Tninguzr, at RBC Capital Markets, said Saudi Arabia has a much larger area to keep the dollar peg policy. And it withstood Saudi Arabia and other countries linked to the dollar, such as in the Gulf of Oman and Bahrain before the drop in oil prices in the past.
But this time may be different. Kinsella as it is believed that the Saudi peg is on borrowed time now, undermined by weak foundations that would lead to the escape of capital Whatever you do the authorities to keep the exchange rate regime.

Peg does not last forever, he says Jax. There are not a lot of credibility about the linkage idea. Currency peg is quite a bit when monetary policy is going in one direction. Now we have needs in varying significantly policies.

© Al Qabas 2016