Diversification Deluge?
Figures from the State Administration of Foreign Exchange released on Thursday showed Q1 FX reserves in China increased by $128.4bn. Even if we discount factors such as valuation and redemptions, this represents the biggest quarterly increase in reserves since Q2 2011. Clearly, the view that ‘peak reserves’ would approach soon in Asia as currencies adjust towards fair value is somewhat misplaced, and the diversification flows out of the dollar represent a clear short-term risk to our strong dollar call. In addition, Japanese outflows post-BoJ into Emerging Markets may lead to new liquidity challenges, pushing potential reserve growth even higher. However, before calling for new highs in EUR and AUD on the back of reserve buying, we note that the latest round of reserve growth in China and beyond may have different characteristics from previous rounds, and the diversification flows themselves may also surprise.
Click here to read the full report: UBS
UBS