Attention Finally Turns To Saudi Arabia’s “Secret” US Treasury Holdings
The system which underwrote decades of dollar dominance and kept a perpetual bid under USD assets met an untimely demise when the Saudis moved to bankrupt the US shale complex by deliberately suppressing oil prices.
The implications, we said, would be far-reaching.
For years, oil producing nations plowed their USD crude proceeds into USTs and other dollar assets in a virtuous loop both for the currency and for the nation that printed it. The “Great Accumulation” (as Deutsche Bank calls it) of USD FX reserves ended for good in early 2015 but no one noticed until China began to liquidate mountains of US paper in an attempt to manage a runaway devaluation effort.
By the start of September, all anyone wanted to talk about was the depletion of EM FX war chests as the world suddenly came to understand that the selling of FX reserves amounts to QE in reverse and might therefore serve to tighten global monetary conditions, drive up yields on core paper, and sap liquidity as traditional net exporters of capital suddenly stopped buying amid slumping commodity prices and the yuan fiasco. Some wondered if the reserve drawdowns would cause the Fed to delay liftoff as the FOMC would effectively be tightening into a tightening.
Against this backdrop we said that the most important chart in the world may well be one that depicts the combined FX reserves of Saudi Arabia and China.
Now that Saudi Arabia’s oil price gambit has backfired on the way to blowing a hole in the kingdom’s budget that amounted to 16% of GDP last year, the market is speculating that Riyadh’s vast SAMA reserves could disappear altogether – especially considering the added cost of funding the war in Yemen and maintaining the riyal peg.
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