Thinking About ReAllocations – AUD and CAD

A few reports have surfaced on the latest IMF release of the Currency Composition of Official Foreign Exchange Reserves (COFER) for 2Q13.

Citi summarised the gist of the results.

  1. Reserve managers holdings of EM currencies drop sharply in Q2 by 30%
  2. Big buying of CAD and AUD continued by about 15%
  3. In G4, USD, EUR and GBP were sold, JPY was bought (correcting for currency valuation effects)
  4. Total reserves accumulation was the lowest since Q1 2009

Granted that all these refer to the currency reserves of central banks, with the exception of China and a few others, around the world and some sovereign entities, we should not be over worried about how representative it is on the actions of the rest of the world. Yet it should be significant enough for us to sit up and be aware of the designation of flows for the future and it is highly probably that the 3Q flows are mostly similar.

We can also surmise that there has been reserves erosion as a result of the EM mini crisis we had in Aug with central banks fighting to protect their respective currencies. This has a knock on effect especially with those central banks which allocate by trade weighted baskets which make ASEAN particularly vulnerable.

AUD and CAD were introduced as separate currencies in June this year and they have been growing in significance in at least 55% of global reserves that this report covers. This bodes well for the currencies and I believe the trend will continue at the expense of EM which is an ominous sign for their stock markets.

As I write, I am envisaging that future investment decisions will need to encompass the element of political and social stability. Much of the turmoil we are experiencing is the direct result of imbalances of that nature; political impasse in the US; decades of rife corruption affecting the BRICS; and most of all, experimental economic policies like Abenomics which is inspired by the Great QE experiment.

Allocating to matured economies in the AUD and CAD would be a prudent step to wealth preservation while we wait for the rest of the world to clean up their act.