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Central banks take shine to Canadian dollar (but they like Australian dollar more)

Canadian dollars


The world's central banks have taken a shine to the Canadian dollar, but they like the Australian currency more.

Central banks held almost $95-billion (U.S.) of loonies in the first quarter, compared with about $90-billion at the end of 2012, the International Monetary Fund reported Friday.

It was the first time the IMF made specific mention of Canada's currency in its quarterly roundup of the foreign-exchange reserves held 144 central banks that participate in the survey. Those institutions held a total of about $6-trillion in the first quarter, meaning Canadian dollars represented about 1.5 per cent of all reported holdings.

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The IMF's expanded list of reserve currencies reflects dramatic shifts in the world economy over the past decade.

Previously, the IMF made specific mention only of the traditional reserve currencies: The U.S. dollar, the euro, the British pound, the Japanese yen and the Swiss franc. (In times past, it recorded the Deutsche mark, the French franc and the Dutch guilder.) Every other currency was lumped in the "other" category.

But in recent years, central banks began to lose faith in the traditional reserve currencies. The U.S. dollar has been on a long, slow descent, and the European debt crisis raised concern over whether the euro will continue to exist in its present form. Japan, with a mountainous debt and stagnant economy, appeared on the verge of crisis.

That backdrop prompted reserve managers to diversify. The Canadian and Australian dollars – backed by stable economies that benefited from sound fiscal policy and commodity wealth -- emerged as popular choices, based on anecdotal evidence. Now, thanks to the IMF, their popularity has been quantified.

And at the moment, it is Canada's Commonwealth cousin that is drawing the most interest. In the first quarter, central banks held $98.7-billion of Australian dollars, a 10 per cent increase from the fourth quarter, when central banks held $89.7-billion.

Australia pulled ahead as international investors began to doubt whether the Canadian economy's post-crisis strength had staying power. The housing market, which powered the recovery, cooled dramatically, while exports and business investment continued to sputter.

The shift in the economic backdrop prompted the Bank of Canada to signal that it would leave interest rates extremely low for longer than it has previously intended. Canada's dollar, on average, traded at par with the U.S. dollar in 2012. On Friday, it was trading just a little above 95 cents.

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Nevertheless, the IMF figures show the Canadian dollar is entrenched as a secondary reserve currency after the U.S. dollar. Notably, the Canadian and Australian currencies swamp the Swiss franc, a historic haven for foreign-exchange traders. Central banks in the IMF survey held $16-billion (U.S.) of the currency in the first quarter, compared with $17.2-billion in the fourth quarter.

The other story line in the IMF report is that the end of the U.S. dollar as the world's de facto means of exchange remains a long way off. Central banks held $3.76-trillion of greenbacks in the first quarter, an increase from $3.73-trillion at the end of 2012. That's about 62 per cent of total reported holdings.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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