CNH: USD/CNH - Finds Support Toward 7.0600, Suspect Sellers On a Bounce

The Fed's latest H.4.1 release on Nov 5 showed reserves picked up from the prior week's post-2020 lows to $2.85T, up $24B in the latest week but still down $182B over the last month. 

• This of course has been the mirror image of movements in the Treasury General Account which briefly touched $1T though settled Wednesday at $943B (a fall of $41B on the week, but a rise of $149B in a month).
• Treasury indicated this week that it maintained its $850B quarter-end cash target, with the recent buildup due in part to the federal government shutdown slowing outflows but also a typical cautionary cash rase ahead of large seasonal expenditures.
• The Fed's reverse repo facilities remained in relatively negligible territory albeit with a slight pickup at month-end October.
• Overall the Fed has recognized that it may be getting close to the transition point between once-"abundant" and now merely "ample" reserves, hence October's decision to end net asset runoff as of Dec 1.
• NY Fed President Williams said Friday morning “Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves." 

A few highlights from the Fed's latest Financial Stability report out today (link):

• In terms of asset valuations, "Prices remained high relative to their historical relationship with fundamentals across a range of markets."
• The report highlights high leverage in the financial sector: "Vulnerabilities associated with financial leverage remained notable. Over the past few years, hedge funds’ leverage has steadily increased across a broad range of strategies, including those involving Treasury securities, interest rate derivatives, and equities"
• However "Vulnerabilities from business and household debt remained moderate" and "The banking sector remained sound and resilient overall, and most banks continued to report capital levels well above regulatory requirements."
• In terms of future risks, "A further increase in term premiums leading to higher-than-anticipated long-term interest rates, particularly if accompanied by
  persistent inflation, could pose risks for both borrowers and lenders"
• And the Fed has its eye on "opaque off-balance-sheet funding arrangements" re the recent voliatility caused by First Brands and Tricolor: "The recent bankruptcies of two privately held firms, an auto parts supplier and a subprime auto lender, so far appear to be isolated events. However, these examples highlight that unexpected losses could arise from opaque off-balance-sheet funding arrangements that may be used by certain privately held firms."

Fed Gov Miran makes yet another argument in favor of his position that policy rates should move down substantially, saying that stablecoin adoption could also weigh on "r-star". Recall in a speech in September he made a rough estimate of nominal r-star for the Fed funds rate of between 2-2.5%, well below current rates.

• Miran says: "My thesis is that stablecoins are already increasing demand for U.S. Treasury bills and other dollar-denominated liquid assets by purchasers outside the Unted States and that this demand will continue growing. All else equal, this new demand lowers borrowing costs for the U.S. government. However, as a central banker, my focus is on what I believe may be a substantial and long-term force putting downward pressure on a crucial guideline for monetary policymakers known as r*."
• "I believe a range of different factors are putting downward pressure on r* and should be considered in formulating monetary policy. Some researchers have tried to estimate how much stablecoin growth might lower interest rates. In 2024, work by Marina Azzimonti and Vincenzo Quadrini estimated that if stablecoins are in widespread use and fully backed by U.S. securities, it could put as much as 40 basis points of downward pressure on interest rates."
• Added to his table below from September's speech, that suggests he may see further downside risks to r-star from his previous estimate - though he's already the most dovish member of the FOMC in terms of current rate-setting.