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The yen's share of allocated reserves edged higher in 2016 to 4.21% from 4.03%. The dollar value rose to $332.77 from $274.77. Of this $58 bln increase, about $7.7 bln can be accounted for by the yen's 2.8% appreciation. The remainder is accounted for by China's declarations or new purchases of yen.

Sterling's share of allocated reserves fell from 4.86% at the end of 2015 to 4.42% at the end of last year. The dollar value of reserves allocated to sterling increased by $17.95 bln, but sterling's 16.25% decline would have drained $5.4 bln. Between China and other central banks trying to maintain a fixed allocation to sterling likely played the decisive role.

The Australian dollar's share of global reserves eased to 1.85% from 1.92%, while the Canadian dollar's share edged up to 2.04% from 1.87%. We note that Canadian dollar appreciated almost 3% against the dollar in 2016, while the Australian dollar eased almost 1.1%. The US dollar valuation of the Australian dollar in reserves rose $15.1 bln to $146.1 bln. The US dollar valuation of Canadian dollar holdings rose $33.2 bln to $160.8 bln,

The use of the Swiss franc as a reserve asset has diminished. It was hardly a significant reserve currency but the negative interest rates that still go out a decade likely discourage reserve managers. The franc's share of reserves fell from 0.29% of allocated reserves to 0.17% last year. This represented a $6.0 bln decrease in the dollar valuation to $13.7 bln.

The yuan share surpasses the franc's share easily, and it remains an open question how fast it explores it upside potential. We suspect that central banks will be cautious and opportunistic. China's onshore bond market is accessible, but there may still be liquidity concerns, and, as a store of value, there may be open questions. In the near-term, the risks are on the downside of the yuan and Chinese bond prices.

Let us conclude with a word about the IMF's "other" category of currencies. With the yuan being taken out, one reasonably might have expected a corresponding decline in this category. However, the decline was more modest $12.2 bln. At the end of 2016, reserves in currencies not broken out by the IMF had a dollar value of $201.2 bln or 2.55% of allocated reserves. At the end of 2015, the "others" were worth $213.3 bln or 3.13% of allocated reserves. What is going on? We suspect that the results may reflect that China holds some "other" currencies in reserves, like the Singapore dollar, South Korean won. Some central banks may also have an allocation to Russian rouble, which appreciated 20% against the dollar in 2016.

Marc Chandler‚Äč
Global head of currency strategy at BBH
Brown Brothers Harriman

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