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 The near year-long slide in the euro and the move below zero of many
euro zone government bond yields has driven a shift by official
institutions, among the world's most conservative investors, on how
they manage their $11.6 trillion of FX reserves.
Several analysts, mostly in conjunction with bearish forecasts on
the euro, said they expect central banks' euro-denominated reserves
to fall below 20 percent of overall holdings over the coming
quarters from around 22 percent.
A continued decline in the euro's value against the dollar will
account for much of that, but outright selling could still run into
a 12-figure sum - a significant flow out of the single currency and
a major force for further weakness.
"This shift could amount to as much as $104 billion per year,"
according to estimates from Goldman Sachs.
The latest International Monetary Fund data show that global FX
reserves fell by 3.1 percent, or $383 billion, in the second half of
last year to $11.6 trillion. Around two thirds of that was due to
valuation effects from the euro's 11.7 percent fall in that period,
according to JP Morgan.
The euro's share of all reserves fell to 22.2 percent, the lowest
since 2002.
Stephen Jen, manager of the SLJ Macro hedge fund in London, reckons
that will fall by a further 2-4 percentage points in coming
quarters, equating to a reduction of roughly $240-$480 billion.
About half of that would be valuation effects and half active
divestment, meaning central banks could be dumping euro assets worth
up to $240 billion onto the market.
"Reserve divestment from the euro will be powerful," Jen said.
"Central bank reserve managers don't like negative yields."
The European Central Bank's commitment to flood the financial system
with over 1 trillion euros through an 18-month long bond-buying
program to choke off the threat of deflation has had an instant and
massive impact.
The euro has tumbled towards parity with the dollar and bond yields
across the region have sunk to the lowest in history, in many cases
below zero.
CENTRAL BANKS SELLING BONDS TO ECB?
Declines in global FX reserves are rare.
The fall in the second half of last year was the biggest since the
global financial crisis, and the sixth largest in nearly 50 years,
according to JP Morgan.
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Most of the last 20 years have seen a rapid rise in exports from
emerging market and oil-producing countries to the developed world,
resulting in huge dollar inflows which have been banked into FX
reserves.
Reasons for the recent shift away from that pattern include: the
plunging oil price, the euro's sharp depreciation; slowing growth in
emerging markets; and many of those countries drawing down reserves
to prop their currencies up against a rampant dollar.
Ordinarily, these central banks might have had difficulty in finding
a buyer for their depreciating euro assets. But with a third of the
euro zone government debt market trading with a negative yield and
the ECB just a month into its bond-buying spree, these are not
ordinary times.
The ECB has so far bought 61.7 billion euros of bonds. It's unclear
how much, if any, of that has come from other central banks as
trades would be done via third parties.
Foreign exchange reserve managers typically hold short-term,
low-risk, high-quality assets such as AAA-rated sovereign bonds,
around 2 trillion euros of which currently boast a negative yield.
But this doesn't necessarily mean holders of these assets are losing
money, as the coupons offered may still nominally be positive. But
the returns are negligible, so it's no surprise some central banks
have had enough.
"If you're sitting on bonds at these yields, and if you have a large
non-commercial player coming in to buy, it's time to sell," said
Philip Laine, Whately professor of political economy at Trinity
College in Dublin.
"The question is what do you recycle into?"
(Reporting by Jamie McGeever, editing by John Stonestreet)
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