Trump's Trade War Threatens Central Bank `Put,' Deutsche Says

  • Weak global reserve growth pressures dollar and Treasuries
  • Less central bank intervention removes market support: Ruskin

Will There Be a Trade War?

A breakdown in the relationship between dollar weakness and Asian central bank intervention poses a risk to Treasuries, stocks and all risky assets, according to Deutsche Bank AG.

Attempts by the Trump administration to clamp down on currency manipulation have limited the ability of central banks across the region to buy U.S. assets when the dollar weakens, and dampen the appreciation of their currencies, strategist Alan Ruskin write in a note Friday. These purchases have historically limited the greenback’s downside and acted as a “put” on Treasury market weakness, he wrote.

Such central bank puts are usually associated with successive Federal Reserve chairs willing to support the wider market with loose monetary policy. While such puts have been a continuous focus for investors, markets now risk overlooking other sources of central bank support that may be slipping as the U.S.’s “synergistic relationship with China,” comes to an end, according to Ruskin.

“It is not a coincidence that in this recent period of dollar weakness, Treasury bonds were also soft,” he said. “Historically, foreign central banks of sizable current account surplus countries like China, Taiwan, Korea and Thailand would have been intervening.”

According to the strategist, the “end of Chimerica” means American current account deficits are no longer financed to the same degree by Asian central bank reserve recycling of corresponding trade surpluses. That reduction in demand for Treasuries from foreign reserves is coming at a time when U.S. fiscal supply is set to increase dramatically, putting extra pressure on the country’s bond market.

China is the largest holder of U.S. Treasuries with about $1.2 trillion of the securities, according to the latest U.S. government data. However, its relative share of the market is near its lowest since 2005, at 9.4 percent.

This “profound shift” in Treasury supply and demand dynamics has implications for other markets, according to Ruskin. The indirect support to the dollar and Treasuries from Asian central bank intervention also acted as a “put” for other risky assets.

“In the ‘new anti-intervention world,’ when the dollar is weak, it will be prone to be associated with Treasury bond market weakness,” he said. “The historic ‘put’ on the bond market was also an effective brake on equity market weakness and a source of support for all risky assets.”

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