FX Reserves – All Things Considered Equal Presentation (14.04.16)
- There has been much scaremongering about the decline in Emerging Market (EM) central bank FX reserves – the firepower policy-makers have to defend currencies.
- A year ago I argued that market concerns about level/direction of these FX reserves were overdone. I reiterate my view that EM FX reserves remain sizeable despite modest decline from mid-2014 peak when currency-valuation effects are factored in and we look beyond China and commodity exporters.
- In March, FX reserves rose across the board on stronger global risk appetite and capital inflows and FX reserves are up from June 2014 in India, Korea, Taiwan and Thailand.
- FX reserves are considerable in Non-Japan Asia (NJA) economies, bar Malaysia, India and particularly Indonesia. They are small in most of Latin America and in major African economies (including Egypt, Nigeria and South Africa).
- This is likely to continue influencing ability and willingness of central banks to slow, let alone stop, FX depreciation by intervening in the FX market.
- As an aside, the yen has failed to materially weaken, despite the Japanese Finance Ministry’s recent verbal intervention. This highlights how a widening policy-credibility deficit can stymie policy-makers’ ability to slow, let alone stop, rapid FX appreciation.
- If, and it’s a big if, the Japanese Finance Ministry intervenes in the FX market before the BoJ’s 28th April policy meeting, it will have to be aggressive to be effective.
Read the accompanying article ‘FX Reserves – All Things Considered Equal‘