banks. It reports the data at the end of each quarter with a quarter
lag. At the end of last year, the IMF published the Q3 16 reserve figures. As often is the case, the Q3 reserve figures get lost in the
holiday shuffle.
Nevertheless, there are a couple of
interesting developments. First, though, let review the basics.
Overall, the valuation of global reserves rose to a little more than $11
trillion, a $36 bln build on the quarter,
but off $182 bln from Q3 15. It is awkward to say, but the $36 bln
increase in reserves in Q3 16 is so small that it is practically a rounding
error. Currencies did not fluctuate much in the quarter (euro rose almost
1.2%, and the yen rose 1.8%, sterling was
off nearly 2.6%), but still could likely account for much of the change.
The other important point to recall is that not all central banks report
the currency allocation of reserves. Of the $11 trillion of reserves
almost $7.8 trillion are allocated, leaving $3.2 trillion unallocated. Of
the allocated reserves, the dollar accounts for 63.3%, the euro accounts for
20.3%, the yen and sterling are about 4.5% each, and the Australian and
Canadian dollars are 2% each. The Swiss franc and other currencies
account for the remainder (~3.3%).
Central banks typically move slowly and
cautiously when adjusting reserves. However, there is an
important development that is taking place. China has agreed to report the allocation of its reserves.
However, it is slowly bleeding them in preserve their confidential nature.
Allocated reserves rose by $299 bln in Q3. Unallocated reserves
fell by a little more than $263 bln. Over the past four
quarters, total reserves have fallen by $182 bln. Allocated reserves have
increased by $1.19 trillion, while unallocated reserves have fallen by $1.37
trillion.
China seems to be the main driver here. Starting with the Q4 16
COFER report, out at the end of March, the
IMF will break out the yuan’s allocation. We suspect the yuan’s share of
reserves is around 1.5%, despite its inclusion
in the SDR.
By a narrow margin of less than two percentage points, the UK voted to
leave the EU at the end of Q2 16. There has been a debate about
what happens to sterling’s status as a reserve asset going forward. One quarter is hardly sufficient to reach any
firm conclusion, especially given the gradual nature of central bank
adjustments.
The valuation of sterling reserves rose $1.9 bln in Q3 to $350.8 bln.
This is small. Of the increase in
allocated reserves, sterling’s share was 0.06%. Sterling’s decline of
2.6% depressed the change but more may be
taking place. The volatility of sterling and the decline in
Gilt yields (from 1.4% on the eve of the referendum to 50 bp by the middle of
August) may have deterred some central banks. There is also the risk that
the figures are distorted by China’s
selective inclusion of allocated reserves. The situation is worth
monitoring in the coming quarters. Over the past four quarters, sterling has accounted for about 3.3% of the
allocated reserves, which is a bit lower than the share of overall reserves.
On the other hand, the yen’s share of allocated reserves is rising faster
than one might expect. The
valuation of yen holdings rose nearly $21 bln in Q3, which is accounts for
about 7% of the increase in allocated reserves. Over the four-quarter
period, the yen’s share of the increase in allocated reserves was about
8.5%. We suspect that this is largely a function of
China. It had been reported a
relatively active investor in Japanese debt instruments. The dollar value
of yen holdings appears poised to surpass
the dollar value of sterling’s holdings (currently GBP=$350.8 bln and
JPY=$349.7 bln).