Forget 'QE', Beware of 'QT'

QE, or quantitative easing, was a hot topic during the financial crisis, as central bankers pushed the envelope of monetary police to spur growth. These days, as trends shift, investors have a new acronym to fret about, 'QT' or quantitative tightening.

The topic was discussed in research note by Deutsche Bank strategist Robin Winkler. In her view, the "great accumulation" is over, FX reserves have peaked, and investors should "beware of QT."

"Following two decades of unremitting growth, we expect global central bank reserves to at best stabilize but more likely to continue to decline in coming years," said Winkler. "Three cyclical drivers point to further reserve draw-downs in the short term: China’s economic slowdown, impending US monetary tightening, and the collapse in the oil price."

Winkler also thinks structural changes have permanently reduced the need for reserves.

"China’s new FX regime would lead to less intervention in the medium-term. EM external positions are stronger than two decades ago reducing the need to recover reserves beyond prior peaks. Oil prices are unlikely to return to previous highs reducing petrodollar recycling. And both the SNB and BoJ have moved away from currency intervention as their primary monetary policy tools."

The analyst continued, "The implications of our conclusions are profound. Central banks have accumulated 10 trillion USD of assets since the start of the century, heavily concentrated in global fixed income. Less reserve accumulation should put secular upward pressure on both global fixed income yields and the USD. Many studies have found that reserve buying has reduced both bund and US treasury yields by more than 100bps. For every $100bn (exogenous) reduction in global reserves, we estimate EUR/USD will weaken by ~3 big figures."

Winkler concluded, "Placed against global QE, the secular shift in global reserve manager behavior represents the equivalent to Quantitative Tightening, or QT. This powerful, but countervailing force is likely to present additional headwinds towards developed market central banks’ exit from unconventional policy in coming years."

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