Research Team at ING, suggests that the idea that the basic mechanics of the Fed’s new normalisation tools could in effect see a transfer of US Treasury holdings from domestic to foreign institutions.
“Taking a closer look at the H.4.1. figures so far, we find that around 65-70% of the demand for ON RRPs in recent weeks has been coming from the foreign official accounts component. The rising USD liquidity within the foreign repo pool is not a new phenomenon and had been a feature for much of 2015. Yet, while in 1H15 this had occurred alongside an increase in foreign holdings of US securities, this was not the case in 2H15 and recent weeks.
Why does this matter? A material rotation out of non-USD reserves (ie, euros) into Treasuries might provide some support for the USD, especially when central banks are intervening in FX markets to maintain currency stability. Yet, there are a number of moving components involved, and determining whether we are seeing foreign central banks increase their USD share of reserves requires further analysis.”