Latest COFER Data--Reserve Allocations

The IMF publishes its COFER report of official reserve holdings at the end of the quarter for the proceeding quarter. Q1 data was released today. 

In percentage terms, the US dollar's share slipped to 60.7% of the allocated reserves, down from 61.5% in Q4 10 (61.8% in Q1 10). Contrary to some market talk, the yen's share did not increase and remains at 3.8%. This does represent an increase from Q1 10 when the yen's share was 3%. Sterling share ticked up to 4.1% from 4.0%. It was 4.3% in Q1 10. The euro's share rose to 26.6% from 26.2% in Q4 10, but is a lower than the 27.2% of Q1 10. The "other category" which includes the Australian and Canadian dollars, rose to 4.7% from 4.4% in Q4 10 and 3.6% in Q1 10.

This trend into other currencies outside of the handful of majors seems set to continue. The trend that seems to enjoy some persistence is that the unallocated reserves continue to grow. They now account for 45.3% of reserves up from 44.7% in Q4 10 and 44.1% in Q1 10. These unallocated reserves look to be largely accounted for by China, which does not report the currency allocation of its massive reserves, Taiwan, which is not a member of the IMF (only countries can be) and is suspected not to be part of the COFER reporting. 

Many observers often forget to make allowances in the shifting reserve figures for valuation adjustments. This is not only about the changing foreign exchange prices, but also the assets in which reserves are kept. For example, the fact that US Treasuries have generally generated a higher return than bunds (yields and capital gains) may offset the impact of a weaker dollar on valuation of reserves over time. 

Looking at the raw data also may generate insight into what central banks are actually doing. For example, advanced industrialized countries did not add to their dollar holdings much ($1.6 bln), but developing countries added about $65 bln. This may reflect intervention and the conversion of trade surpluses in some countries. Developed countries appear to have bolstered their euro holdings by about $42 bln, while developing countries holdings increased by about $28 bln. Recall though that in Q1 the euro appreciated by almost 6%. Bunds lost ground, with the 10-year yield rising almost 40 bp in Q1 and the yield was about 1.6%. 

The COFER data is clear, confirming that it is the developing countries that continue to diversify their reserves away from the majors. The developed countries reduced their holdings of "other" currency reserves by about $1 bln, while the developing countries boosted their "other" holdings by almost $25 bln. Altogether total foreign exchange reserves values rose by about $430 bln in Q1 after about a $270 bln increase in Q4 10. 

Yen holdings are also interesting, given the coordinated intervention in March. Developed countries' yen holdings increased by about $2.7 bln. Developing countries' yen holdings increased by almost $5.5 bln. The yen was the weakest of the major currencies in Q1, falling about 2.4% against the dollar and JGBS declined and the yield was about less than 0.6%. 

Even though the dollar component of reserves actually increased, the fact that as a percentage of allocated reserve fell will give the "dollar is history" camp fodder, but as unallocated reserves grow, observers can be less confident in trends in this the most authoritative of reserve data bases. In addition, a more complete analysis would focus on the valuation component in a more rigorous fashion that can be provided in this short note. Lastly, central banks move glacial speed and trends are more important than quarter-end snap shots.