by Bill O’Grady and Kaisa Stucke
[Posted: 9:30 AM EDT] After a strong rally yesterday, we are seeing some consolidation this morning. There is lots of news this week, with a full lineup of U.S. economic data today (see below), Fed minutes tomorrow and a G-7 meeting over the weekend. The latter will be quite interesting. Japan wants permission from the rest of the G-7 to weaken the JPY, which it probably will not get. Recently, the Treasury tightened its oversight of the currency markets and is creating a new procedure to call out developed nations that it deems to be manipulating its currency. Although we don’t know if this will create material changes in U.S. foreign exchange policy, the groundwork does appear to be in place. Japan needs a 120 ¥/$ exchange rate, but it doesn’t appear that the other six nations in the G-7 are in alignment with this goal. If the G-7 rebuffs Japan, it will be interesting to see if Japan acts alone. We tend to think Japan probably will.
The FT is reporting that China’s curbs on outflows will reduce residential real estate buying in North America and elsewhere. On the West Coast, from San Diego to Vancouver, local reports indicate a steady and strong influx of Chinese homebuyers which has tightened markets and boosted prices. If this story is accurate, that situation is poised to ease.
The Treasury unexpectedly released Saudi Arabia’s direct Treasury holdings after not detailing them for 41 years. The Treasury doesn’t have rules on its disclosures and some nations may use custody holders in the Caribbean, the U.K. or Belgium for some of their holdings, which will tend to understate the actual ownership. Last month, Saudi Arabia, angry about proposed legislation that would allow the victims of the 9/11 terrorist attacks to sue the kingdom, threatened to sell its $700+ bn of Treasury holdings. This is mostly an idle threat; we doubt the market would struggle to find buyers and, in an emergency, the Fed could simply buy the bonds and expand its balance sheet. The official value of the kingdom’s Treasury holdings is only $116.8 bn. Given that its total reserves are $587.1 bn, this would mean only 19.9% of its reserves are in Treasuries. We suspect the number is much higher and being held by custody holders.
We are much more interested in the Obama administration’s decision to publish the actual holdings. The decision by the Ford administration to group the OPEC nations together when publishing their Treasury holdings appeared to be an agreement among allies to reduce the visibility and transparency of Saudi Arabia’s holdings. In the 1970s, the level of “petrodollars” in the U.S. banking system raised fears that the oil producers would “own” the U.S., and we suspect the decision not to detail the data was designed to address those concerns. Thus, the decision to now reveal the data probably further signals that relations between the kingdom and the U.S. have cooled and that the administration is no longer concerned about the American public’s attitude toward Saudi Arabia.
Venezuela announced it has restructured its debt with China. The Chinese have lent Venezuela $50 bn, much of which is paid with oil. Although the overall terms of the loans are not known (parts have been previously restructured), in 2010, Venezuela was sending 0.5 mbpd to meet loan terms. Estimates suggest this may now be as high as 1.0 mbpd. In theory, as the price of oil declines, China could demand more oil to meet loan payments. We don’t know if this is the case now; the Maduro government is claiming that China has relaxed its terms, which we find hard to believe. China typically doesn’t do that. If China did ease terms, it may have done so because it is very worried that the government may be on the verge of collapse. If it does collapse, it would be short-term bullish for oil prices. In February, Venezuela was the third largest foreign source of oil to the U.S.