USD: Evidence of FX reserves rebalancing – Nomura

By FXStreet Research Team at Nomura, suggests that the FX reserves rebalancing may explain some of the weakness in USD.

Key Quotes

“USD has been weak in recent months and has even diverged from its rates differentials, suggesting that some other factors are at play. The USD appreciation over the past two years has led to big changes in the share of USD and EUR in FX reserves and reserve managers are likely to be tempted to rebalance their portfolios.

Looking at flow data, we find that the foreign official sector sold a record amount of USTs in December and January, at a time when there was a marked moderation in the amount of FX interventions. This may suggest that FX reserve managers were rebalancing the composition of their reserves away from USD into other currencies (EUR and JPY), and may explain some of the USD weakness this year.

The evidence also suggests that the decision by the Chinese authorities to change their focus to the RMB TWI from USD/CNY could also have led to some of the FX rebalancing flows.”
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Source:: FX Street