John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 10 January 2018 at 13:22 GMT

USD drops on claims that China losing interest in Treasuries

Head of FX Strategy / Saxo Bank
  • Report claims China could halt Treasuries accumulation
  • Speculative story sparks major move in USD
  • 'De-dollarisation', CNY key issues to watch in China

By John J Hardy

A Bloomberg story citing sources-in-the-know suggests that Chinese officials responsible for reviewing China’s FX holdings recommend a halt to accumulating US Treasuries. This set off a flurry of across-the-board USD selling, and here we look at a couple of reasons why the market sold the USD on the story.

The story was met by a flurry of USD selling on reports that Chinese officials have apparently recommended that US Treasuries look less attractive relative to other assets; the report also claimed that "trade tensions with the US may provide a reason to slow or stop buying American debt."

There are myriad reasons why the story, if true (it is very important to watch now for follow-up information or official denials/"non-denials"), is important. It may in fact trigger a USD rout, depending on what is really going on. Below are some thoughts on why the immediate market reaction was so forceful, but let’s keep in mind that if this story is denied, markets could quickly go back to square one... and then some (USD grabbing back much of lost ground).

The People's Bank of China, Beijing: Is China really calling a halt to Treasury accumulation?Photo: testing /

The US already came into this year very vulnerable on the fiscal front, as the deficit was widening and will be made very significantly worse by the newly passed tax reforms. The deficit shortfall could push close to $1 trillion this year, and this in a year of economic expansion! So any Treasury buyer supposedly announcing that they are stepping away from accumulating Treasuries is negative for the USD on balance if true.

Also, the USD was already rather shaky versus the Japanese yen on recent news out of Japan that the Bank of Japan failed to grow its balance sheet in December and is buying fewer long Japanese government bonds at its next round of purchases than it has previously. Many believe that this points to an eventual BoJ policy normalisation and again, USDJPY had already corrected significantly lower before this China story broke. 

This would add to the global "central bank policy convergence" narrative, the idea that even the BoJ is moving away from accommodation and may eventually play catch-up with the Federal Reserve, just as 2017 was the year the euro rose on the prediction that the European Central Bank would eventually taper.

USDJPY: The dollar lost around 40 pips versus JPY on the release of the news

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank 

China is supposedly looking to "de-dollarise" its trade relationships to as large a degree as possible. The more it can succeed in doing so, the more it can reduce its USD reserve holdings (and USD is generally held as US Treasuries) as it won’t need these for portions of its trade. On that note, some might say that this is a shot across the US’ bow on any risk that the Trump administration is set to confront China with aggressive trade policies (effectively, the officials make the point of linking it with US trade policy anyway). 

This is a stark reminder that there is a long, ongoing effort underway to “de-dollarise” China’s trade relationships and make it less reliant on the USD.

Before President Trump won the election, China was divesting itself of Treasuries in a slow fashion after it changed its FX regime starting in August 2015, allowing the USDCNY to rise as the CNY devalued with US Treasury reserve holdings levelling out in 2015 (as Chinese total reserves were in a freefall) and then actually falling for much of 2016. 

The chief reason for the decline in Chinese holdings of US Treasuries over this period was likely that it was mobilising USD reserves (selling US Treasuries) to intervene in the FX market and avoid an even more rapid decline in the CNY. But after the November 2016 US election, China apparently had a change of heart regarding its FX regime and began accumulating Treasuries again, having added about $10 billion/month to its supply over the last year. 

The rise in Treasuries dovetailed with a rise in the CNY from USDCNY 6.95 to below 6.50 at one point.

Or is it all about CNY?

An alternative theory 180 degrees against the de-dollarization and trade war narrative holds that China’s real concern is that the move to apparently halt the USDCNY slide at 6.50 could mean that capital hot money outflows become a risk again and it will need to sell US Treasury holdings to defend the yuan against excessive weakening (at every signal, it seems speculators take the ball and try to front-run China’s policy intentions). 

Again, some might point to China’s accumulation of Treasuries in 2017 as part and parcel of the reason the USDCNY rate fell during the year as China had to brake the CNY’s rise with interventions and USD buying. 

Why China apparently wants the USDCNY to stop falling at 6.50 is another question – is it merely to swat carry traders who had leveraged USDCNY short positions, or because it now wants to weaken the CNY again as a shot across the bow to Washington?

Or is it to avoid domestic deflationary pressures via a CNY devaluation as it plans on starting to deleverage its economy after the February 16 Lunar New Year celebrations? 

We won’t know, but we will watch for further signals from China even more closely than ever.

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail