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Foreign Exchange

Reserve managers stick with EUR holdings in the first quarter

Figures from the IMF show global reserve managers kept the proportion of EUR in their portfolios stable in the first quarter.

The IMF’s Cofer data reveal global foreign exchange reserves grew by $226 billion in the first quarter to $10.4 trillion, the largest increase since the second quarter of 2011. The bulk of reserve growth came from reserve managers in emerging markets, who added $187 billion to their stockpiles, while reserve managers in advanced economies added $39 billion. Since the dollar lost 0.8% on a trade-weighted basis in the first quarter, it suggests EM reserve managers were intervening to stem the rise of their currencies.

Allocated reserves of central banks that report the composition of their holdings to the IMF represent 55% of the total. Of those, reserve managers kept 24.9% in EUR, marginally down from 25% in the fourth quarter of 2011, while the proportion of USD was flat at 62.2%.

“Contrary to popular belief and supportive of EUR, data suggest that fears over Europe have not materially changed the allocation to the EUR,” says Camilla Sutton, head of FX strategy at Scotiabank.

She notes, however, that the data only covers the first quarter of the year, before concerns over the eurozone debt crisis resurfaced in earnest.

 Reserve managers stay loyal to EUR and USD

 
 Source: Scotia FX, Data Insight, IMF

Meanwhile, allocation to GBP rose from 3.8% to 4%, while JPY holding also rose from 3.8% to 4%. Holdings of CHF also ticked higher, but represented just 0.1 % of the total.

One notable move was a reduction in allocation towards what the IMF terms “other” currencies.

That group includes everything other than USD, EUR, GBP, CHF and JPY. It is widely believed to consist mainly of smaller G10 currencies, in particular commodity-linked currencies such as AUD and CAD, which have become increasingly attractive to reserve managers amid increasing fears over the effect of quantitative easing from the US, Europe and Japan on their currencies.

FX reserve managers decreased their allocation to “other” currencies by $3.6 billion to 5.1 - the first decrease since the first quarter of 2009.

 Allocation to "other" currencies falls

 
 Source: Scotia FX, Data Insight, IMF

  “The selling of ‘other’ currencies is a big change, although the buying in recent years has been much bigger,” says Steve Englander, head of G10 FX strategy at Citi. “This could be important if it persists and represents a long-term de-risking of reserve portfolios.”

One problem with the IMF data is that they include a large proportion of unallocated reserves, such as China’s stockpiles, by far the world’s largest.

Indeed, Sutton says the reduction in allocated reserves towards “other” is not likely to be the start of a trend. She says anecdotal evidence suggests that China, other central banks that do not report allocation, were large buyers of “other” currencies such as CAD in the first quarter.

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