Last year Russia previously indicated it was thinking about adding Australian and Canadian dollars to its reserves. More recently it said it was preparing to do just that. At the end of last week, the ECB’s Noyer opined that these two currencies were going to have an increased role as reserve assets. There is even some talk that when the composition of the SDR is reviewed toward the end of the year, as it is every five years, that the Canadian and Australian dollar may be added.
While these developments and talk are supportive for the respective currencies, the risk is that observers exaggerate these structural arguments to justify a further cyclical advance.
The next set of the IMF’s COFER data is out at the end of the month and will cover Q1. Valuation considerations warn that the US dollar’s share of reserves (where the allocation is reported) is likely to rise from the 62.1% reported for the end of 2009.
In the allocation the IMF breaks out the dollar, euro, sterling, yen and Swiss franc’s share of reserves. The catch-all other category includes the Australian and Canadian dollar. This "other category" accounted for 3.1% of the allocated reserves. This puts "others" as a whole above the yen’s share of 3.0%, but below sterling’s share of 4.3%. The Swiss franc’s share, for the record was 0.1%.
The low share of reserves accounted for by the yen suggests that the size of the economy and size of the bond market are not enough to ensure a significant reserve function. However, the size of the Canadian and Australian bond markets refine this assessment and suggests size is necessary but not sufficient.
The Canadian bond market is roughly C$380 bln (~$372 bln) and Australian bond market is about A$137 bln (~$120 bln). While these are big enough for some, even most central banks, they seem to small to be significant for the top 8-10 countries where global reserves are concentrated.
Sweden’s Riksbank has diversified its reserves and roughly 5% of its approximately $37.8 bln in reserves into Australian and Canadian dollars. in Contrast China’s reserves in March were 64 times larger than Sweden’s. Brazil and Taiwan’s reserves are round 6.6 times larger than Sweden’s. No central bank, or sovereign wealth fund, or other large pools of capital want to be the largest owner of any one issue. This would seem to limit the role of the Australian and Canadian dollars as reserve assets.
That said, the bullish case for these currencies remains intact regardless of their reserve status. Healthy banking systems, relatively high interest rates and the linkages to commodities remains the heart of the bigger picture bull story.