Has the Fed’s Taper Talk induced foreign selling, swap and bilateral currency deals?

Has the Fed’s tapering inspired a foreign sell off in US assets and for countries to increase swaps and bilateral currency deals?

From Bloomberg:

Foreign investors were net sellers of U.S. long-term portfolio assets in August as China reduced its holdings of Treasuries to a six-month low.

The net long-term portfolio investment outflow was $8.9 billion after a revised $31 billion inflow in July, the Treasury Department said in a statement today in Washington. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, and China lowered its holdings of U.S. government debt for the second time in three months, the department said…

Today’s report showed China remained the biggest foreign owner of U.S. Treasuries in August even as its holdings dropped $11.2 billion to $1.27 trillion. Japan, the second-largest holder, increased its share by $13.7 billion to $1.15 trillion, the figures showed.

Based on updated TIC data (prior to June are unrevised), the Japanese (both investors and the government) have aggressively been buying USTs since Abenomics (must be signs of capital flight for private sector). 

However, the debt ceiling standoff has reportedly prompted for a net selling of USTs in early October.

On the other hand, China has posted a sustained decline in UST holdings since April.

Various Asian countries have undertaken ex-US dollar deals.

From Wall Street Journal Blog

On Tuesday, China and Singapore announced they would introduce direct trading between their currencies. Beijing also said it would allow Singapore-based investors to take yuan funds raised in the city-state and invest them in mainland securities markets.

Singapore follows in the footsteps of London – which gained so-called RQFII status last week – and Hong Kong. The move, designed to promote use of the yuan and broaden the investor base in China’s markets, builds on other measures taken recently that aim to reduce Asia’s dependence on the U.S. dollar.

Earlier this month China signed a 100 billion yuan ($16.4 billion) swap deal with Indonesia. It has existing pacts with Australia, South Korea and a number of European countries.

South Korea this month signed currency-swap agreements with Indonesia, Malaysia and the United Arab Emirates worth around $20 billion. Officials say they’re considering more such deals, in addition to existing pacts with China and Japan.

Swap agreements – in which central banks pledge to provide each other with currency, usually on a short-term basis – often are enacted during periods of financial turmoil, but more recently have taken on a greater role in trade and diplomacy.

The arrangements are small compared to use of the dollar for international transactions, which accounted for foreign-exchange turnover of around $4.65 trillion a day, or 87% of the global total, according to triennial survey conducted by the Bank for International Settlements in April.

Still, the swap deals help insulate Asian currencies a bit from the whims of speculative investors, and make it more likely their movements will reflect trade needs or economic fundamentals. China and South Korea got off relatively lightly during the market turmoil this summer, but some of those they’ve signed swap deals with — such as Indonesia — were hit hard as investors fled emerging markets.

It is true that currency swaps or bilateral domestic currency trades have been small, nonetheless such deals means that many Asian governments have been gradually redirecting or decreasing their exposures on the US dollar. As Chinese philosopher Laozi once said, a journey to a thousand miles begins with a single step.

China and Thailand have even undertaken a project to build a railway connection between the two countries, where Thailand will for pay for her share in the cost of railway construction via barter, particularly rice and rubber.

Also currency swaps are not a free pass or license for bubbles. They serve as possible cushion from currency based tail events. Mismanagement by governments will result to market crashes or crisis regardless of swaps.

And speculators don’t just drive markets up or down according to “whims”, but through perceived profit opportunities mainly based on changing expectations of fundamental conditions of specific political economies.

In other words, meltdowns don’t happen because of confidence alone, but because of perceived (rightly or wrongly) dramatic negative or adverse changes in fundamentals that incites an abrupt loss of confidence of market participants whose actions are ventilated on the markets via a stampede or panic.

All these foreign selling of US assets, swaps and bilateral trade or barter deals have been evident in the continued fall of the US dollar.

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