Yuan-na Bet? Germany, France Add Chinese Yuan To Currency Reserves

Last week, amid “rumors” that China was considering “halting” purchases of U.S. Treasurys, Bloomberg’s Richard Jones and later BofAML suggested the timing seemed awfully convenient.

“The conspiracy theorist in me thinks the timing of this announcement is not accidental, and that the fact that Emmanuel Macron has been in China this week is not a coincidence,” Jones wrote just minutes after the original Bloomberg story hit early Wednesday morning in the U.S.

A couple of hours later, BofAML noted that “the announcement is timely as it coincides with President Macron’s official visit [and] with politics in the Euro Area on a more stable footing, improving macro fundamentals and the end of ECB QE in sight, the EUR as a reserve currency appears to be an increasingly attractive long-term proposition.”

Since then, the euro has of course soared, rising for four consecutive sessions through Monday, helped along first by the China story (which dented the dollar as soon as it crossed), then by the “hawkish” ECB minutes, and finally, by ongoing speculation that Draghi will ultimately choose not to extend APP through December once the current extension (which runs through September) expires. Hawkish rhetoric from Ardo Hansson only served to embolden the euro bulls on Monday. Here’s where things stand:

Well in light of the above, it’s worth noting that earlier today, Bundesbank board member Andreas Dombret told an audience in Hong Kong that Germany will be adding the yuan to its reserves.

“The renminbi is used increasingly as part of central banks’ foreign-exchange reserves — for example, the ECB included the RMB but also other European central banks did so,” he said.

Later, a spokesperson for the Bundesbank told Bloomberg that “the decision for a future investment in Renminbi was made in the summer of 2017.”

Ok, so fast forward several hours and Les Echos reported that the Bank of France is already investing part of its foreign reserves in the yuan. “While the Bundesbank wants to integrate the yuan into its foreign exchange reserves, the Banque de France is already using it as a currency of diversification,” Isabelle Couet writes, adding that while a “major part” of foreign currency holdings remain invested in USD, “diversification can evolve over time based on considerations of liquidity, investment horizon or optimization of return/risk ratio.”

There’s nothing particularly surprising (per se) about any of that considering the yuan’s September 2016 inclusion in the IMF’s SDR and the currency’s increasingly prominent role in the global financial system but again, the timing of these stories is interesting.

One interpretation could be that Europe is setting up to keep a lid on euro strength as EURCNY climbs back towards 8.00 (that’s assuming you’re inclined to believe the ECB would eschew simply jawboning the euro lower – something they’re quite adept at – in favor of a move that, on a crude interpretation, amounts to outright intervention under the guise of “diversification”). An even more cynical interpretation is that everyone is conspiring to fuck Donald Trump, which is all kinds of hilarious.

Don’t forget that there are still questions about the extent to which China is committed to a liberalized FX regime. We were moving in that direction (ostensibly, although we could have a long discussion about what the shift actually meant in practice) starting in August 2015, but tighter capital controls and the addition of the counter-cyclical adjustment factor to the fixing mechanism last summer seemed to suggest that the push towards a more flexible currency is always going to be subjugated to other concerns when push comes to shove.

Last week, the PBoC sidelined the counter-cyclical adjustment factor in an apparent effort to put the brakes on the yuan’s rally against the dollar, a rally which found the currency retracing the entirety of the move lower that followed the relaxation of reserve requirements on forwards in early September. But then, on Monday, the PBoC strengthened the yuan fixing by 0.55% (the biggest increase in three months) to 6.4574, the highest since May 2016, propelling the currency to a two-year high. So you know, who the fuck knows, right? If you want to get even deeper into the weeds, go back and read the note SocGen’s Kit Juckes put out back in September after the rules on forwards were relaxed.

Whatever the case, the Bundesbank and Banque de France news is worth noting and we’re absolutely positive it will come up again sooner rather than later.