A Word On Q3 COFER - It Might Not Be What You Think

The IMF offers the most authoritative report on central bank reserves on a quarterly basis with a quarter lag. The report, the Currency Composition of Official Foreign Exchange Reserves (COFER), covering Q318 has been released.  It may be have been overlooked during the holidays, but if and when the pundits see it, the leading takeaway is that the dollar's share of global reserves fell below 62% for the first time five years.  The end is nigh, we will be told. 

Not to worry. It is like comparing stock market moves based on point changes rather than percentage change.  It is the wrong metric.  Because all the assets are converted into dollars, there will be some variances that are just noise, like turning your steering wheel a little before the wheels turn. Although the data is reported to hundredths of a percent, we accept that such precision is more illusion than real and based on estimates and constantly fluctuating instruments. 

There does not seem to be a material difference between 60% or 65%. What matters is the broad developments over the years, a trend.  Over the last 20 years, the dollar's share of global reserves has been fairly stable.  The euro's share of global reserves in Q3 18 stood at roughly 20.5%.In 1995, the German mark (15.75%), ECU (8.53%), French franc (2.35%), and Dutch guilder (0.32%) combined for just shy of 27% of global reserves. The euro, at 20-years old, is still not bigger than the sum of its parts in terms of a reserve currency. 

The dollar's share of global reserves is not only the wrong metric, but it is also the wrong narrative. A shift in the dollar's reserve status is simply not the main development in this space.  The most important development has been China's agreement to report its currency composition to the IMF.  China has slowly bled them in, and this is reflected in the huge shift from unallocated to allocated reserves. Allocated reserves were valued at $10.705 trillion at the end of Q3 18, this is up from $9.643 trillion at the end of Q3 17. While allocated reserves rose by $1.062 trillion, overall reserves rose by only $106 bln. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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