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Forex Flash: Central Bank Reserve Data - BBH

FXstreet.com (Barcelona) - Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman notes that at the end of last week, the IMF reported the latest reserve figures for Q4 2012.

He notes that overall currency reserves stood at $10.9 trillion at the end of last year, up $734.5 bln over the course of the year. Most central banks provide the currency allocation of their reserves. However, there were two notable exceptions: China, which regards the information as a state secret and Taiwan, which is not a member of the IMF. He adds that unallocated reserves total $4.85 trillion with the lion's share accounted for by these two nations. In percentage terms of allocated reserves, the dollars share slipped to 61.9% from 62.1% and the euro´s share was unchanged at 23.9% with yen easing to 3.9% from 4.1%.

However, he feels that a more nuanced look at what took place is possible by looking at the change in amounts rather than percentages. For example, he writes, “The decline in the share of allocated reserves account for by the dollar does not mean that a single dollar was sold. To the contrary, central banks added $31.4 bln to their reserves in Q4 and $247 bln all of last year. Of the 2012 increase, $78.5 bln was accounted for by the high income countries (what the IMF calls "advanced"). The means that developing countries were net buyers of dollars and hardly diversifying away from the greenback.”

Further, he adds that allocated reserves held in euros rose $20.6 bln in Q4. This is after pullback a $11.5 bln decline in Q3 and are now the highest since Q2 2011. Last year, he notes that the high income countries bought $106 bln worth of euros for reserves. However, he sees that developing countries sold almost $45 bln of euros over the course of 2012; reducing euro holdings in each quarter, except for the Q1 12. In Q4 2012, sterling and yen holdings were pared by $2.7 bln and $8.5 bln respectively. Nearly the entire $26.7 bln that sterling reserves rose in 2012 could be accounted for by the high income countries ($21.2 bln). He writes, “Of the $33 bln increase in yen holdings, the high income countries accounted for a little more than 2/3.”

High income countries are also account for the lion's share of the diversification into the "other" category, which is dominated by the Australian and Canadian dollars. He notes that the share of allocated reserves accounted for by this category stands at a record 6.1% at the end of last year. Roughly $54.8 bln was added to this category last year, of which $40.5 bln was purchased by the high income countries. He feels that in either Q1 or Q2 this year, the IMF will break out the Australian and Canadian dollars from the "other category", to better reflect what is actually taking place. He adds that it is an accounting function, not normative in the sense for prescribing what countries ought to do.

Chandler finishes by writing, “Lastly, despite the relatively low volatility in the foreign exchange market, the IMF's data needs to be adjusted for valuation swings. The figures used for the IMF's calculations show that the dollar rose 2.5% against sterling and the yen by 11.5% in Q4 12, while it appreciated by 2.1% against the euro. Over the course of 2012, the dollar slipped 2% against sterling and euro, while appreciated about 11.4% against the yen.”

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