China's SAFE - Dollar is Key, But Diversification A Goal

Last updated 12/4/2009 3:34 AM ET (GMT -5) 7 Comments

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Boris Schlossberg

Director of Currency Research, GFT

China’s State Administration of Foreign Exchange (SAFE) stated today that US dollar remains a key part of its foreign reserve strategy but also noted that it is seeking to diversify amongst the major currencies and high quality assets. It noted that this policy has supported the country’s imports of energy products and helped the country to stabilize its sovereign ratings.

In a nod to its critics regarding its tightly controlled yuan exchange policy SAFE went on to state that it will accelerate easing its capital account management and that it wishes to improve the managed float yuan exchange system.

The statement from SAFE provided little fresh insight into Chinese foreign exchange rate policy, but it did spark a small rally in the euro and the pound on the notion of reserve currency diversification. With more than 2 Trillion of USD reserves China clearly feels that the dollar portion of its foreign exchange portfolio is more than sufficient at current levels. Furthermore, as it’s purchases of Treasury notes and bonds from earlier in the decade come to maturity, China has rolled those positions into shorter term instruments preferring liquidity over risk.

Overall however, China’s preference for safety and liquidity in its foreign exchange rate portfolio leaves it with little choice but remain heavily positioned in US fixed income instruments which remain the most liquid capital markets in the world. Nevertheless, today’s commentary by SAFE is hardly a vote of confidence for the greenback and could only add to its woes if the current, steady downdraft in the dollar accelerates sharply suddenly threatening the value of China’s massive FX positions.

Comments (7)

FXDragon

December 04, 2009 at 03:43 AM ET

What short term instruments did china roll into?

bschlossberg

December 04, 2009 at 04:06 AM ET

It moved into shorter term maturities like from 10 and 5 to 2 year notes

FXDragon

December 04, 2009 at 04:53 AM ET

I see. So after this news, are you planning any change to your stance on a due correction for eurusd? Im still long for long term. What price level would your understanding of a correction be? 1.45 mybe or lower?

bschlossberg

December 04, 2009 at 06:26 AM ET

I think 1.45 will be the initial primary support if we see a correction

FXDragon

December 04, 2009 at 07:04 AM ET

I just think your eurusd correction theory contradicts with your long term bearish usdjpy stance that i recall. Unless there's any change in either one.

Kind regards,

bschlossberg

December 04, 2009 at 03:26 PM ET

Yea actually I havent been bearish USdJPY since it hit 85.00 and with today's good NFP's it likely to go higher on US yield pick up

FXDragon

December 04, 2009 at 06:32 PM ET

I dont expect a pick up that soon so we'll see...

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.