FYI | Oct 17 2006
By Chris Shaw
A key theme in foreign exchange markets earlier this year was the potential for the larger holders of foreign exchange reserves, namely China, Japan and Russia, to begin looking to diversify their holdings away from what were largely US dollar balances.
The theory was diversification would provide them with some insurance given their respective holdings of foreign exchange reserves were growing so quickly, but nothing eventuated and the story lost traction in the marketplace.
But yesterday’s announcement by the Russian Central Bank it intends to diversify into the yen at the expense of its other major currency holdings has brought the story back into the spotlight, as well as highlighting the potential for upside for the yen from current levels.
As Danske Bank notes, Russia’s reserve of foreign exchange have increased by more than 50% this year to stand at around US$268bn according to Central Bank figures, with a further US$71bn held in the oil stabilisation fund.
Of this, it is estimated the split is roughly 50% in US dollars, 40% in euros and 10% in the British pound, though first deputy chairman of the Central Bank Alexei Ulyukayev has indicated from next year the bank would be looking to move some of these reserves into the yen in particular but also into other currencies such as the Australian and Canadian dollars.
Danske Bank points out such a move makes sense as it would bring its holdings more into line with its trading, as roughly 10% of Russian exports go to the Asian region. DBS suggests the move also highlights the fact the US dollar is overvalued, so it has not changed its view the yen is likely to strengthen further against the US currency by the end of the year. IDEAGlobal strategist Divyang Singh disagrees though, suggesting the positive impact for the yen is unlikely to last as it would be more psychological than anything else.
DBS is forecasting a rate of 114 by the end of December, which is not inconceivable given Danske Bank estimates a move to a holding of 3% of reserves in yen would imply buying several billion dollars worth. ANZ estimates the Central Bank could move to a position of 7% of reserves in yen, which would indicate potential buying of as much as US$18bn based on current reserve levels.
The announcement by the Russians was not the only supportive news for the yen, as in a recent speech in Tokyo famous trader George Soros said there was evidence of some pressure on Japanese authorities to not let the yen weaken further, implying the 120 level will be difficult to breach. ANZ also pointed to this level as being a key, with the Russian news likely to give further support to that key support level.