Nine Observations on Q3 Reserve Data
The IMF reported Q3 currency composition of foreign exchange reserves at the start of the week when many were on holiday. We offer the following observations.
1. As a whole, central banks drew down reserves during the financial crisis and have been rebuilding them. Total fx reserves stood at $10.78 trillion at the end of Q3 2012. This compares the estimated value of all above-ground gold (@~$1670 an ounce) of $8.49 trillion.
2. This represents a $610 bln increase over Q3 2011. This compares with the estimated value of the new gold produced in 2011 of about $125.5 bln. The bulk of the increase in currency reserves (~3/4 or $414 bln) came from countries that report the allocation of their reserves. China and some Middle East countries are strongly suspected not to report the allocation of their reserves.
3. The Swiss National Bank, which has defended a cap on the franc, appears to have played a critical role in the allocated reserve accumulation. SNB's figures show its currency reserves rose about $200 bln in the Q2-Q3 period (~$74 bln in Q3 after ~$122 bln in Q2).
4. The US dollar's share of allocated reserves was essentially unchanged at 61.8% in Q3 from Q2 and fractionally higher than the 61.6% share in Q3 11. The euro's share slipped to 24.1% from 25% in Q2 and 25.6% in Q3 11.
5. The minor reserve currencies, sterling and the yen saw their share of allocated reserves increase. For the first time in several years, the yen's share has edged above sterling's share (4.11% to 4.09%). In Q2, sterling and the yen each accounted for 3.83% of the allocated reserves. This compares with 3.9% and 3.7% for the sterling and the yen respectively in Q3 11.
6. Although there was much fanfare (in the media) when the IMF indicated it was considering listing the Australian and Canadian dollars separately in its report on reserves, it did not do so in its latest report. They are still lumped together in the "other" category. This category's share of allocated reserves rose to 5.5% from 5.2% in Q2 and 4.9% in Q3 11.
7. While some central banks may be boosting gold reserves, there is no evidence for the claim that they are moving out of fiat currencies. In dollar-terms, only euro holdings fell and this was by a marginal ~$8.2 bln to $1.45 trillion. US dollar holdings increased by $112.5 bln to $3.71 trillion. Sterling holdings rose almost $22 bln to $245.8 bln. Yen holdings rose $23.5 bln to $247 bln. Swiss franc reserves rose $3.4 bln to $20.2 bln. The "other" reserve currencies rose $27.6 bln to $331.9 bln.
8. Looking forward, China and Switzerland's reserve accumulation appears to have slowed in Q4. On the other, capital inflows into emerging bond markets and the reduction of tail risks in Europe suggest that currency reserves may have continued to increase, albeit at a slower pace, and that the euro's share may have increased.
9. Valuation adjustment that takes into account currency movement as well as bond market movement is necessary to further hone in reserve preferences. In Q3, the euro, yen and sterling were gained between 1.5% (euro) and 2.9% (sterling) against the dollar. Bond markets were little changed over the course of Q3.
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