Petro Peggers Getting Enough?
Given my recent obsession with global macroeconomic imbalances I cannot afford to let this one from the FT published a couple of days ago go unmissed.
Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.
The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency.
Market liquidity is traditionally low in December, and many traders have locked in profits, potentially reinforcing volatility.
Russia and the members of the Organisation of the Petroleum Exporting Countries, the oil cartel, cut their dollar holdings from 67 per cent in the first quarter to 65 per cent in the second.
Meanwhile, they increased their holdings of euros from 20 to 22 per cent, the BIS said. The speed of the shift may help to explain the weakness of the dollar, which recently fell to a 20-month low against the euro and a 14-year low against sterling.
The BIS, the central bank for the developed world’s central banks, is customarily cautious in its language. However, it noted: “While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks’ liabilities to oil exporting countries.”
So is this the beginning of the slide? Well, the thing to watch out for is whether the moves themselves are showing up in the Euro/Dollar value. I mean, of course they are to some extent but there is still an important point about which investors are doing the pushing here. If central banks in the Middle East and Asia seriously begin to move the reaction will be prompt and violent. However, let us not get carried away here and of course Brad Setser is also all over this ... Russia seems to be a key component in the somewhat misleading picture painted by the FT here.
I would be somewhat cautious though. Russia tends to drive the BIS data on oil exporters, as it now accounts for the majority of the growth in oil state deposits in the international banking system. It turns out that only $5b of the $16b increase in international bank deposits by Russian residents (including Russia's central bank) in q2 were in dollars. But we already more or less know Russia diversified its (now very large) reserves in q2.
But more importantly is the point on whether the BIS data set is any good tracking petroexporters' reserve moves ...
But I wouldn't look to the BIS data for great insight into what other OPEC countries (Libya excepted) is doing with its money. Why not? I have spent a fair amout of time trying to track down OPEC's surplus in general, and the GCC's surplus in particular. Rachel Ziemba and I will have a paper out on this soon. The big countries in the Gulf simply don't have that much money on deposits in BIS reporting banks and they certainly aren't increasing their (net) deposits in BIS banks.
However, we are hedging our bets here ...
The overall data -- and it admittedly is incomplete -- still suggests to me that central banks are buying a lot more dollars (and somewhat fewer euros) in 2006 than they did in 2005.
Alas, all this data is stale. The key question is whether central banks are currently supporting the dollar -- or whether they are currently adding to pressure on the dollar.
I would bet that they are still supporting the dollar. But that is a guess.
Watching the data is a key excercise here and no-one as far as I am concerned is better than Brad here ... when the Arabs buy one of Frankfurt's notes he will know :). On the other hand, the extent to which we are musing about whether the Asian and Middle Eastern CBs are supporting the dollar obviousy also hinges on their ability to support the Euro and the Yen. Remember there is a flipside here.