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Reserves are weakly diversifying in EUR if not selling - SocGen

FXStreet (Bali) - Sebastien Galy, Senior FX Strategist at Societe Generale, notes that the lack of month-end support for EURUSD showed that reserves are weakly diversifying in EUR if not selling.

Key Quotes

"The lack of month-end support for EURUSD showed that reserves are weakly diversifying in EUR if not selling, compared to a historical 67 percent rate of purchase. Diversification is still happening to limit the risk of an extreme concentration of reserves in the USD, over time."

"Diversification likely favors Asian currencies (AUD, JPY, KRW et al). Some with managed exchange rates then react by intervening."

"Their FX rates move little as a consequence, while foreign reserves far more for an incremental flow of funds into managed EM FX. Much of that ends up in the front end of the UST curve dampening the expectation of Fed rate hikes. Large reserves with buy and hold books likely maintain high duration even faced with the risk of Fed tightening."

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