The world's central banks are stashing away Canadian dollars at a faster rate than any other major currency, a vote of confidence at a time when the loonie has lost some of its shine in foreign-exchange markets.
Official holdings of Canadian dollars surged 23.6 per cent to $112.5-billion (U.S.) in the third quarter of this year from their level in the fourth quarter of 2012, according to International Monetary Fund data published Monday.
None of the other five currencies that receive explicit mention by the IMF gained anywhere near that much, suggesting that demand from central banks may help to put a floor under the Canadian dollar's recent slide.
The loonie declined about 7 per cent against its U.S. counterpart this year, the biggest drop since 2008, as commodity prices slumped and the economy sputtered. Forecasters at Bank of Nova Scotia say the Canadian dollar will struggle to regain its previous strength in 2014 because economic growth will remain lacklustre, while data published by the Commodity Futures Trading Commission show more traders are betting the Canadian dollar will fall than there are betting it will rise.
Despite the downbeat outlook, the IMF figures demonstrate that Canada's dollar is a growing favourite of reserve managers. Central banks value stability and may be putting greater weight on the federal government's pledge to balance the budget than on shorter-term changes in economic growth. The Canadian dollar rallied Monday, gaining 0.6 per cent to about 94 U.S. cents.
Adrian Miller, director of fixed-income strategy at GMP Securities in New York, said central banks are taking advantage of the opportunity to diversify their holdings rather than necessarily wagering the loonie will increase in value. "Having said that, I'm sure central banks are comforted with the fiscal outlook of Canada despite an economy that will lag the U.S. by [half a percentage point] in 2014."
Canada widened its lead over Australia, the other relative newcomer to the exclusive club of reserve currencies, in the latest IMF report. Holdings of U.S. dollars and euros were marginally higher, while central banks decreased their stashes of British pounds and Japanese yen. The status of the Swiss franc was little changed.
The IMF's quarterly reports on official reserves are imperfect. The tally is voluntary and only 145 of the fund's 188 members participate. The list of participating countries also is confidential. The holdings of the countries that report the allocation of their foreign-exchange reserves amounted to $6.19-trillion in the third quarter, a little more than half of the world's total accumulation of $11.4-trillion.
Still, the data are a decent gauge of longer-term trends in foreign-exchange markets. The U.S. dollar continues to dominate, despite much grumbling from emerging markets in recent years about the greenback's outsized role in the global economy. Central banks held $3.8-trillion in greenbacks at the end of the third quarter, amounting to more than 61 per cent of allocated reserves.
But that's not as dominant as the U.S. dollar was in 2000, when it represented about 70 per cent of allocated reserves. The introduction of the euro provided an option for central banks, and that currency now represents about a quarter of allocated holdings.
In recent years, as the U.S. economy collapsed and questions emerged about the ability of European authorities to hold the euro zone together, reserve managers looked for new hedges against global instability. The Canadian and Australian dollars emerged as attractive options, adding demand that helped push both currencies to parity with the U.S. dollar. The IMF first reported information for both currencies in its reserves data for the fourth quarter of 2012.
The interest of foreign-exchange traders in both the Canadian and Australian currencies has waned this year as commodity prices slumped and the economies of both countries sputtered. Yet central banks remain keen to hoard the two currencies, especially the loonie, which has jumped ahead of its Australian cousin in the IMF's tally.
To be sure, the Canadian and Australian dollars continue to make up relatively small portions of central bank portfolios. Canada's currency represents about 1.9 per cent of all allocated reserves, and Australia's represents about 1.7 per cent. That's better than the Swiss franc, but less than half the percentage represented by the British pound and the yen.