by Marc Chandler, Minyanville staff writer
The IMF reported Q3 currency composition of foreign exchange reserves at the start of the week when many were on holiday. My firm offers the following observations.
1. As a whole, central banks drew down reserves during the financial crisis and have been rebuilding them. Total foreign-exchange reserves stood at $10.78 trillion at the end of Q3 2012. This compares the estimated value of all above-ground gold (at a price of ~$1670 per ounce) of $8.49 trillion.
2. This represents a $610 billion increase over Q3 2011. This compares with the estimated value of the new gold produced in 2011 of about $125.5 billion. The bulk of the increase in currency reserves (~3/4 or $414 billion) came from countries that report the allocation of their reserves. China and some Middle East countries are strongly suspected not to report the allocation of their reserves.
3. The Swiss National Bank SWZNF, which has defended a cap on the franc, appears to have played a critical role in the allocated reserve accumulation. SNB's figures show its currency reserves rose about $200 billion in the Q2-Q3 period (~$74 billion in Q3 after ~$122 billion in Q2).
4. The US dollar's share of allocated reserves was essentially unchanged at 61.8% in Q3 from Q2 and fractionally higher than the 61.6% share in Q3 11. The euro's share slipped to 24.1% from 25% in Q2 and 25.6% in Q3 11.
5. The minor reserve currencies -- the pound sterling and the yen -- saw their share of allocated reserves increase. For the first time in several years, the yen's share has edged above sterling's share (4.11% to 4.09%). In Q2, sterling and the yen each accounted for 3.83% of the allocated reserves. This compares with 3.9% and 3.7% for the sterling and the yen respectively in Q3 11.
6. Although there was much fanfare (in the media) when the IMF indicated it was considering listing the Australian and Canadian dollars separately in its report on reserves, it did not do so in its latest report. They are still lumped together in the "other" category. This category's share of allocated reserves rose to 5.5% from 5.2% in Q2 and 4.9% in Q3 11.
7. While some central banks may be boosting gold reserves, there is no evidence for the claim that they are moving out of fiat currencies. In dollar terms, only euro holdings fell and this was by a marginal ~$8.2 billion to $1.45 trillion. US dollar holdings increased by $112.5 billion to $3.71 trillion. Sterling holdings rose almost $22 billion to $245.8 billion. Yen holdings rose $23.5 billion to $247 billion. Swiss franc reserves rose $3.4 billion to $20.2 billion. The "other" reserve currencies rose $27.6 billion to $331.9 billion.
8. Looking forward, China and Switzerland's reserve accumulation appears to have slowed in Q4. On the other, capital inflows into emerging bond markets and the reduction of tail risks in Europe suggest that currency reserves may have continued to increase, albeit at a slower pace, and that the euro's share may have increased.
9. Valuation adjustment that takes into account currency movement as well as bond market movement is necessary to further hone in reserve preferences. In Q3, the euro, yen, and pound sterling were gained between 1.5% (euro) and 2.9% (sterling) against the dollar. Bond markets were little changed over the course of Q3.
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