[LFX]

We have begun to see central banks reaccumulating reserves again (use Bloomberg data that run through July). Even with the reduced US external balance and adjusting for currency valuation effects, we have seen a run up in CB reserves acquisition in recent months and the upturn is pretty steep. The question is why central banks (and almost all EM central banks) are accumulating reserves and whether this reserves accumulation is voluntarily or not. As it has occurred in a period of USD weakness, we assume that, as in the past it is associated with a shortfall in private sector demand for dollars. (If the central banks were just adding USD reserves exogenously, it would be associated with USD strength rather than USD weakness.) So, paradoxically, the indications of increasing reserves accumulation are USD negative rather than positive.

[LFX]

A widely read Bloomberg article overnight indicated that investors outside the US had bought 43% of notes and bonds auctioned by the Treasury this year, up from 27% in over the same YTD period last year. Treasury data that are finer in terms of their coverage, but which are published about a week after month-end, point to a similar acceleration but much lower levels. (The difference appears to be that indirect buying at auctions includes some domestic buyers that the Treasury strips out of its monthly data release.) The foreign and international component of participation in Treasury auctions through the end of August was about 25.6%, up from about 15%. Through end-August, total foreign buying would have been about USD358bn out of USD1.4tn, still significant but not quite beating down the doors to scoop up Treasuries. It is also interesting that the cumulative buying at auction by foreigners through end-July is higher than the overall cumulative buying indicated by the TIC data through end July -- by implication, foreigners, while buying in primary markets, have been selling in secondary markets.

[LFX]

The recent aggressive GBP sell-off looks overdone relative to the news, and some continue to expect significant GBP appreciation over the next year. However, this week’s events have clearly increased the uncertainty surrounding BoE policy, even relative to other central banks, indicating it may not be a good time to buy GBP from a risk-reward perspective.

The key event this week will be the publication of the minutes from the September MPC meeting on Wednesday. Money markets are pricing in a significant chance of a change in the deposit rate by the next meeting and a full 25bp reduction by November. The key question is whether a deposit rate was (deemed to be) seriously discussed as an option already at the September meeting. Given market pricing, the risk is that the minutes could reduce the implied probability of a cut and thus be a GBP positive. An associated question is whether the decision was unanimous; some think it will be. Although this would mean, technically, that three members (Governor King, Timothy Besley and David Miles) would be back-tracking from their vote for an additional £25bn of asset purchases at the August meeting, analysts expect that these members will accept the status quo for now and rejoin the battle about the appropriate level of QE at the next Inflation Report assessment in November.