Data from the IMF’s COFER showed global central banks reserves fell about $388bn in H2 14 (with a drop of $223bn in Q3 and $165bn in Q4). Much of drop on a global basis appears to be, however, driven by the effect of a strengthening USD (eroding the value of non-USD FX reserves) rather than global central banks losing reserves in aggregate.
There appears to be a reallocation of reserves underway between EM and advanced economy central banks. Advanced economy central banks have been adding reserves, on an exchange rate adjusted basis, while EM central banks have been losing them. Over the course of H2 14, advanced economy central banks added about $96bn ($22bn in Q3 and $73bn in Q4), whereas EM central banks lost on net $34bn (with $66bn in Q4).
“This divergent behavior by advanced and EM central banks points to the difficulty policy authorities face in alleviating global liquidity needs. On the one hand, certain central banks are having to meet market liquidity demand (mainly USDs), while others are being forced to soak it up (mainly EURs).
As such, this suggests that there are limits to which global liquidity needs can be met by (uncoordinated) central bank action, as well as the extent to which EUR liquidity can substitute for USD liquidity. This reinforces our view that the environment for EMs (especially external borrowers) is unlikely to improve significantly, although a delay in Fed tightening should give EM FX some near-term breathing room.” – said Barclays Capital
The material has been provided by InstaForex Company – www.instaforex.com