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Foreign Exchange

IMF data show reserve managers continue to accumulate small currencies at record pace

Reserve managers have continued their love affair with currencies other than USD, EUR, GBP, JPY and CHF, according to the latest Cofer data on reserve accumulation from the International Monetary Fund (IMF).

Figures showed reserve accumulation in other currencies, which most likely refer to AUD, CAD, NOK and SEK, rose significantly in the fourth quarter of 2011, in terms of flows and share of total reserve accumulation. This was especially true of emerging market (EM) central banks, which accumulated other currencies to the tune of $24billion, the highest change on record. Developed countries also increased their reserves in other currencies, but to a lesser extent, accumulating $6 billion during the quarter.

In terms of the share of total reserves, other currencies maintained a 4% share in advanced economies while reaching a new record-high of 7% in EM economies.

 Share of other currencies in global reserves

 Source: Nomura

Jens Nordvig, global head of currency strategy at Nomura, says the persistent accumulation of reserves in other currencies supports his view that central banks will gradually diversify away from USD and EUR, and into other minor currencies, such as AUD and CAD, and is consistent with strong inflows into Australian and Canadian bond markets observed in the fourth quarter. “The data is not particularly fresh, but the IMF Cofer data can still be used to look at medium-term trends,” he says.

Nordvig says that trend is very clear: there is diversification away from traditional reserve currencies – USD, EUR and, to some degree, JPY – and into other currencies, among which CAD and AUD are likely to feature prominently.

“This theme is not going to determine volatility in the coming week, but it is likely to gradually impact returns in coming quarters,” he says.

“It is a part of the reason we like CAD and NOK – we are long both in our portfolio – and it is likely to support other currencies with safe-haven characteristics going forward too.”

Overall, the data, which covers 55% of total reserves but about 38% of EM reserves and does not include China, showed global reserves rose to $10.2 trillion in the fourth quarter, with EM reserves dropping $29 billion, while advanced economies saw reserve accumulation of $80 billion.

“Overall, this is very modest accumulation but not unexpected in a quarter when EM currencies were under pressure and there were capital outflows from many EM countries,” says Steve Englander, head of G10 FX strategy at Citi.

He says even in a risk-off quarter, USD accumulation, when adjusted for valuation effects, was less than 50% of the total, suggesting that reserve managers were trying to avoid the USD, even in a quarter when EM was under pressure and the USD was viewed as a safe haven.

“EM reserve managers actually sold USD, although this may have been as part of their intervention to stabilize their currencies,” says Englander.

 Currency composition of official foreign exchange reserves (Cofer)

 Source: IMF
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