Zero interest rates, quantitative easing and large fiscal deficits in the U.S., euro area and Japan are forcing reserve managers and investors to seek out sound currencies.
D ata from the IMF show that global reserve allocation to minor currencies has increased from 2% in 2009 to over 5% currently. With global reserves totaling almost $11 trillion, a 1% annual shift would amount to $110 billion – that would be an enormous amount for relatively small currencies to absorb.
There are reports that the shift into minor currencies is continuing.
According to the financial press, the German Bundesbank will begin adding Australian bonds to its reserves by the end of September. Although it is not technically FX reserves, China’s state-owned oil company, CNOOC, announced a $15 billion cash takeover bid for Canada’s Nexen. This single deal alone represents 1% of Canadian GDP. Heavy capital inflows will ensure large basic balance surpluses and upward pressure on the Canadian dollar.
Bottom line: The demand for alternative currencies will remain strong and as these alternative currencies are fairly small and illiquid, they will be prone to significant overshoots in the coming years.