EUR share of reserves falls again – Nomura

FXStreet (Barcelona) - Research Analysts at Nomura, review the IMF COFER data and note that USD continued to strengthen in the fourth quarter while EUR share of global reserves dropped to 22.2%.

Key Quotes

“The Euro share of global central bank reserves fell significantly in Q4 2014. According to IMF COFER data published, the Euro share of global reserves dropped 0.4 percentage points to 22.2%. This was even more striking in emerging markets as the EUR allocation fell 0.8pp to 21.5% from 22.3%, driven both by EUR reserve selling and valuation adjustments.”

“The USD continued to strengthen in the fourth quarter, and there were rebalancing flows as central banks in total sold some dollar reserves, although this was split between EM and advanced economies. EM central banks sold $47.8bn of dollar reserves, while G10 central banks added $16.9bn.”

“Despite the selling from EM central banks, the USD allocation increased, since the USD portion was reduced to a lower degree, down just 2.8% compared to the 4.1% for overall EM allocated reserves.”

“With regard to the Euro (in EM central banks), the active selling exacerbated the valuation effect rather than countering it. This fall in EUR allocation in EM is the not as large as it was last quarter (as the valuation adjustment was much lower), however it was driven much more significantly from EUR selling compared to Q3.”

“One reason for the shift out of EUR as a reserve currency could be the low and often negative yields in Eurozone assets.”

“In Q4, reserve managers accumulated JPY assets aggressively, as JPY weakened even more than EUR during the period. Reserve managers’ stance on EUR and JPY in Q4 shows very clear contrast.”

“If global reserve managers have indeed disabled portfolio rebalancing in the context of their EUR share, it has important negative implications for the Euro in coming months.”