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3 Apr 2015
Room for further selling of EUR assets – BAML
FXStreet (Barcelona) - Strategists at BofA-Merrill Lynch, comment on the latest IMF COFER data on global central bank FX reserves, and further add that the fall to 22% in euro reserves only suggests that there might be further room for EUR selling.
Key Quotes
“The latest IMF COFER data on global central bank reserves show a drop in the EUR share of reserves in the second half of 2014, from 24% to 22%. This presents a reduction in the Euro reserves of $123bn in Q3 and $46bn in Q4, as total allocated reserves fell by $128bn and $99bn in Q3 and Q4, respectively.”
“Central banks are now underweight EUR compared with their historical benchmark. Their EUR share of reserves is the lowest since early 2002. Diversification toward other non-USD currencies and the weakness of the Euro in 2014 explain only part of this drop.”
“Yet, further down the road, it is worth noting that, all else equal, the weakening of EUR in Q1 2015 and moves in other currencies could have taken the share of allocated EUR reserves down 2ppt, to about 20%.”
“This mechanical drop in the EUR share of allocated reserves, back to 2002 levels, could suggest little room for further selling of EUR assets going forward.”
“However, we highlight that this currency breakdown is only referencing allocated reserves, while the equally large portion of non-allocated reserves may have a different currency split.”
“Furthermore, EUR yields have continued to fall since the end of 2014, and this may well put EUR assets as the number one candidate for selling in case reserves have to be drawn upon.”
Key Quotes
“The latest IMF COFER data on global central bank reserves show a drop in the EUR share of reserves in the second half of 2014, from 24% to 22%. This presents a reduction in the Euro reserves of $123bn in Q3 and $46bn in Q4, as total allocated reserves fell by $128bn and $99bn in Q3 and Q4, respectively.”
“Central banks are now underweight EUR compared with their historical benchmark. Their EUR share of reserves is the lowest since early 2002. Diversification toward other non-USD currencies and the weakness of the Euro in 2014 explain only part of this drop.”
“Yet, further down the road, it is worth noting that, all else equal, the weakening of EUR in Q1 2015 and moves in other currencies could have taken the share of allocated EUR reserves down 2ppt, to about 20%.”
“This mechanical drop in the EUR share of allocated reserves, back to 2002 levels, could suggest little room for further selling of EUR assets going forward.”
“However, we highlight that this currency breakdown is only referencing allocated reserves, while the equally large portion of non-allocated reserves may have a different currency split.”
“Furthermore, EUR yields have continued to fall since the end of 2014, and this may well put EUR assets as the number one candidate for selling in case reserves have to be drawn upon.”