Canada Reserve Figures and More

The Bank of Canada reports its reserve figures every week. Today's report is interesting because it covers the joint intervention.

The Bank of Canada sold roughly $124 mln in yen. This follows the UK Treasury's admission that it sold about $150 mln of yen. The BOJ figures suggest it sold JPY692.5 bln (~$8.5 bln). What is particularly noteworthy about the Bank of Canada's operation is that its intervention cut its yen holdings nearly in half. On the face of it, this would suggest a limit to the potential intervention. However, in the past, Japan has provided the yen to foreign central banks that they in turn would sell. Thus, while we regard last month's coordinated intervention as the one way bet on the yen was broken and yen volatility has been sharply reduced, there is no real material barrier to future intervention, which we regard as unlikely.

At the same time, it is noteworthy that , leaving aside the latest COFER data, the yen's role as a reserve assets has generally declined in recent years and this lack of yen in reserves posses a technical challenge to extended yen selling intervention. Japan, as is well appreciated, has been experiencing deflation. It has been mild but chronic. This is yet closer to true price stability than in other major countries. And yet Japan has not been rewarded for this stability in terms of the international use of the yen.

Lastly, as we have noted before Canada, the US largest trading partner has long diversified its reserves. Although the US buys upwards of 90% of Canada's exports, the dollar accounts for 47.2% of Canada's reserves in March down from 47.8% in Feb, but up from 46.7% at the end of last year. In gross terms, Canada holds $28.62 bln US dollars, up from $26.7 bln at the end of 2010. The Bank of Canada holds $18.7 bln worth of euros at the end of March, up from $18.2 bln at the end of last year.

Net-net last month the Bank of Canada held slightly few US dollars than it did at the end of Feb and cut is yen holdings nearly in half. It increased its euro holdings. Either directly or indirectly, then it appears that the Bank of Canada may have intervened effectively on euro/yen.