COLUMN-Euro FX reserve demand returns after years of neglect: McGeever
By Jamie McGeever
ORLANDO, Fla., April 13 (Reuters) – The euro’s share of global foreign exchange reserves has been depressed for years as negative euro zone interest rates and bond yields caused huge outflows of obligations. But this dynamic is reversed and the euro is once again attracting the attention of reserve managers.
The latest data from the International Monetary Fund on the composition of official foreign exchange reserves (COFER) indicates that central banks increased their holdings of euros by $70 billion in the fourth quarter of last year.
It was the most in more than three years, according to HSBC.
The COFER report does not take into account the shocks to financial markets caused by the Russian invasion of Ukraine in February and the heavy economic sanctions imposed by Western countries on Moscow.
They included the freezing of almost half of Russia’s $640 billion in foreign exchange reserves, sparking intense debate over the future of reserves, the status of the US dollar as the world’s premier currency and the prospects for the share. reserves of other currencies.
Morgan Stanley strategist David Adams notes that reserve managers use three main investment criteria to determine their allocations: liquidity, returns and safety. All three boxes could soon be ticked for the euro.
The share of negative-yielding euro zone bonds is rapidly shrinking and European Central Bank interest rates could be positive by the end of the year; liquidity will increase when the ECB starts to reduce its balance sheet; and the Russian-Ukrainian war could further stimulate the issuance of joint prime bonds in the Eurozone.
“If the ECB starts to normalize its policy…it will improve liquidity and increase returns for investors, including reserve managers,” Adams said.
The current share of euro holdings in the $12.05 trillion of “allocated” foreign exchange reserves or whose currency is known to the central bank is 20.64%. The peak was 28% at the end of 2009 and the trough was just under 17% at the end of 2000.
The share of the euro in foreign exchange reserves has been remarkably stable in recent years. From the third quarter of 2017 to the end of 2021, it was stuck in a narrow range between 20.07% and 21.29%. Indeed, it exceeded 21% in only one of these 18 quarters.
During this five-year period, the dollar’s share of global foreign exchange reserves fell nearly five percentage points to a 25-year low of 58.81%.
For the euro, this can be seen in two ways: central banks cooled on the dollar but shunned the euro in favor of other currencies; however, the euro has proven to be more resistant than the dollar to the diversification of the central bank’s foreign exchange reserves.
But there is a lot of ground to be made up following the fall in euro holdings after the ECB went from “ZIRP” to “NIRP” – from a zero interest rate policy to an interest rate policy. negatives – in June 2014. The share of the euro in the global foreign exchange market reserves fell by about 5 percentage points over a two-year period at the time.
According to Tradeweb, the value of negative-yielding euro-denominated government debt on its bond trading platform peaked at almost 7 trillion euros – around 75% of the euro sovereign bond market, which s rises to nearly 9 trillion – end of 2020.
But by the end of last month, the amount of negative-yielding debt had fallen to 2.07 trillion euros, the lowest since at least 2016, when Tradeweb began compiling the data.
Goldman Sachs analysts put the cumulative net outflow from eurozone bond markets since 2014 at nearly 3 trillion euros.
“A reversal of these persistent outflows could have significant implications for the euro,” Goldman strategist Zach Pandl wrote last month when he and his team raised their forecast for the euro to a bullish $1.20 and off. 12-month consensus and $1.30 by the end. of 2024. The euro was at $1.09 on Wednesday.
The reversal appears to be underway.
– Dip in dollar reserves only scratches dominance (Reuters, April 8)
— China may balk at pissed-off reserves chasing yuan (Reuters, March 18)
– Russia’s central bank freeze could accelerate the “peak” of global foreign exchange reserves (Reuters, March 2)
(Views expressed here are those of the author, columnist for Reuters.)
(By Jamie McGeever; Additional reporting by Dhara Ranasinghe in London; Editing by Andrea Ricci)