At the end of the quarter, the IMF reports the currency composition of official foreign exchange reserves (COFER) data for the proceeding quarter. On December 30th, the IMF reported Q3 figures. Here are the 10 take-aways.
1. The pace of reserve accumulation slowed in Q3, rising 0.9% of $95 bln from Q2, when officials reserves rose 3.9% or $380 bln. In Q1 the value of reserves rose 4.8% or $442 bln. From the end of Q3 2010, reserves rose $1.185 trillion and as of the end of Q3 11 stood at $10.176 trillion.
2. Of that $10.176 trillion in reserves, the allocation of $5.446 bln is known in aggregate at the end of Q3, which represents a 0.4% decline. The dollar holdings rose $62 bln among the allocated reserves, while there was an outright decline in the value of the holdings of the other currencies, with the euro’s value falling $58 bln, sterling value declining $15 bln, the yen’s value slipping $4 bln and the Swiss franc’s value easing $500 mln. The “other” category, which includes the Canadian and Australian dollar, fell $6.5 bln in value.
3. This results in the rise in the dollar’s share of allocated reserves to 61.7% from 60.3% in Q2. The euro’s share of reserves slipped to 25.7% from 26.7%. Sterling’s share eased to 3.9% from 4.1%. The yen’s share and 4.8% from 4.9%.
4. Reserves can shift because of conscious decisions to change the allocation such as in diversification or intervention. Reserves can only shift passively solely because of swings in relative foreign exchange prices. Over the course of Q3 the US dollar appreciated against the European complex, with the euro and Swiss franc falling about 3.2% and sterling slipping 0.25%. This may help explain part of the decline in value of the euro and franc holdings. It does not explain sterling’s decline in value. The yen appreciated 0.2% and the value of yen reserves declined. The Australian dollar appreciated 5.6% and the Canadian dollar by 2.8%, which makes the decline in the value of those reserve holdings somewhat more notable.
5. Valuation adjustments for Q4 are on par with Q3. Over the course of the quarter, the euro and Swiss franc declined about 3.25% and sterling by almost 0.5%. The yen was flat and the dollar-bloc appreciated (Australian dollar by 5.8% and the Canadian dollar by 2.8%).
6. Intervention is a source of reserve accumulation. After the Japanese natural disaster in Q1 11, the G7 coordinated an intervention operation in the foreign exchange market. Japan engaged in a unilateral operation in September and over the course of Q3 reserves in Japan rose $61.5 bln. This would seem to largely account for the increase in dollar’s reserve holdings. Japan intervened unilaterally again in late October buying a record amount of US dollars. Indeed, the November figures that are already released show Japanese reserves have risen $112 bln from the end of Q3. Swiss intervention over the course of the third quarter to reinforce the unilaterally imposed franc cap against the euro seems minimal.
7. There is a clear difference of reserve preference between the advanced industrialized countries and the developing countries. The former continues to hold a larger share of its reserves in dollars (65%) than the latter (45%). The advanced industrial countries increased their dollar holdings by $123 bln over the course of Q3, while the developing countries reduced their dollar holdings by $62 bln. In the Q3 10, developing countries had 58% of the allocated reserves in US dollars.
8. Several countries, through the developing world, Asia, central and eastern Europe, and Latin America had explicit policies to sell dollars to prevent or slow the depreciation of their currencies. In some cases officials also operated in the options market. The easing of price pressures and monetary stances may see greater acceptance of weaker foreign exchange prices. The allocated reserves of developing countries fell about $145 bln in Q3after rising about $99 bln in Q2.
9. It will be interesting to see if the stabilisation of the “other” currencies continues. The diversification may have been a one-off, given the scale and liquidity, to about 5% of overall reserves. Both advanced and developing countries reported a decline in the valuation of the “other” reserve currencies despite their appreciation, suggesting a conscious choice.
10. The IMF reports that $4.371 trillion of reserves are not allocated by their owners. It is widely reported that China does not report the allocation of its reserves. Taiwan is not a member of the IMF and it does not seem to report the allocation of its reserves. Between these two, a full three quarters of the unallocated reserves can be accounted for. Yet, the valuation of the unallocated reserves rose by $107 bln in Q3, but China’s reserves rose by about $ 4 bln over Q3 (apparently falling by $60 bln in the month of September). This can be account for largely by the swing in valuation. Assume, for example, China has 25% of its $3.1 trillion of reserves in euros. The euro fell 6.8% in the month of September. This translates into a nearly $53 bln decline. Sterling decline by 4% in September and the Australian dollar by nearly 10%.
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