The IMF announced plans to add the Canadian and Australian dollars to the list of its reserve currencies.
C urrently the IMF reports FX reserve allocations for only five currencies: the U.S. dollar, euro, Japanese yen, British pound and Swiss franc. All remaining FX holdings are lumped together as “other currencies”. Historically, holdings of “other currencies” were fairly insignificant and did not warrant a detailed breakdown.
However, since the global financial crisis and the ongoing sovereign debt problems in the euro zone, reserve managers have been looking for alternatives to the major currencies. From about 2% of total reserves in 2009, the allocation to “other currencies” has risen to over 5%. The Canadian and Australian dollars probably account for the vast majority of this increase.
To be sure, the IMF’s announcement is only a recognition of what central banks have been doing. It does not make the Canadian and Australian dollars any more attractive. Nevertheless, the shift into alternative currencies is a trend that is likely to persist. Global FX reserves total over $11 trillion, so a 1% change in currency allocation during the span of a year amounts to more than $100 billion.
A large sum for relatively small economies like Canada and Australia to absorb.
Bottom Line: Zero bound short term interest rates, ballooning central bank balance sheets, large fiscal deficits and worrisome government debt levels are forcing investors, in both the public and private sectors, to seek out relatively sound alternatives to the major currencies.
CAD, AUD, NZD, NOK and SEK are the main beneficiaries of this trend.