We estimate that EM central banks sold USD 143bn worth of reserves in August, making it the largest fall in EM FX reserves on record. China accounted for USD 106bn of the USD 143bn.
Over the coming months, we expect EM FX reserve outflows to slow given rising credibility of China's new exchange rate system while the economy bottoms out. Overall, therefore, EM FX reserve outflows and rebalancing should slow.
In August, we estimate that if EM reserve holders mechanically rebalance their FX reserves it would imply USD 28.1bn of EUR/USD selling and USD 5.7bn selling of 'other currencies' including SEK, NOK and DKK.
Going forward, slowing EM FX reserve rebalancing should support Scandi markets and lower core euro yields. EUR/USD selling from EM reserve managers should slow in coming months, supporting our medium-term bullish view on the cross.
To Read the Entire Report Please Click on the pdf File Below.