Japanese holdings of US treasuries (see chart below) fell 0.1% to $679.5 billion, posting the 5th monthly drop over the last 7 months, a pattern not seen since 2001. Also, Chinese holdings of US Treasuries slipped 0.6% to $223.5 billion, posting the first drop since February 2004. We have long brought attention to the dissipating rate of Japanese purchases of US Treasuries in light of the negative dollar outlook vis-à-vis the yen. It can be argued that foreign central banks made some Treasury sales to capitalize on the dollar’s rise in March. While the retreat in Chinese holdings may be an aberration, the drop in Japanese holdings of Treasuries proves to be part of an unfolding trend.



 

The chart above also shows that institutions registered in the Caribbean (primarily offshore hedge funds) increased their holdings of Treasuries by 31% to a record $137 billion. This is consistent with the 36% increase in non-official purchases of Treasuries to $42.8 billion.

 

Foreign official accounts were net sellers of US Treasuries for the first time since August 2003. As Treasuries rallied in March, yields fell across the board with the 10-year yield falling below the 4.0% for the first time since May 2004. The loss of the yield luster might have dissuaded foreign central banks from maintaining the pace of accumulation.

 

US residents were once again net purchasers of foreign stocks, standing at $14.4 billion, just below February’s 5-year high outflow of $15.3 billion. The chart below shows that US residents have aimed at exploiting the dollar’s decline by betting on the currency return from foreign stocks





 

As the chart illustrates below, the report strikes at the heart of the worries of the swelling trade deficit and the long term prospects for its financibility. Although we could well see a bounce in the TICS report above the subsequent month’s trade deficit, the long-term trend of the deficit remains downward. The resulting sell-off in the dollar was limited to $1.2647 against the euro and 106.91 against the yen due to the currency’s strengthening momentum following last week’s retail sales figures and the prior week’s payrolls.





As disconcerting as the March TICS data may seem, FX markets are preoccupied with the more current fundamentals of the US economy, namely employment payrolls and consumer spending, both of which have defied concerns of a soft patch. As these data pave the way for expectations of Fed tightening, FX markets have no choice but to extend the dollar’s rally. Just as 9% drop in the March trade deficit may have been an aberration, the 46% drop in the TICS might as well be one.

We continue to see EURUSD supported at $1.2570—the trend line support extending from the 1.1374 low. The key foundation follows at $1.2480—the 61.8% resistance of the rise from the $1.1760 low to the $1.3664 high. Chances of a rebound seen initially capped at 1.2650 and 1.2710.

USDJPY was supported at 106.70--the 50% retracement of the drop from the 111.75 high to the 101.66low. Upside capped at 107.40, followed by 107.89—the 61.8% retracement of the said move.

-May 16, 2005