Sunday, January 24, 2010

Russia Going Loonie

It's was the type of story that flies under the radar of most world media, but has global impact potential.  On January 20, Russia's central bank announced it had started buying Canadian dollars and securities in a bid to diversify its foreign exchange reserves.  Anticipating the move months in advance, a respected analyst said the Russian action could spell the start of a global trend to diversify.  That's good news for some of the world's other currencies, like, in this case, the Canadian dollar, but bad news, for the world's uber currency, the U.S. dollar.

In making its announcement, Russia's central bank was cagey, unwilling to divulge actual amounts up for diversification. 

But analysts, quoted by the Financial Times, said the figure could be up to $9 billion.  That's two percent of Russia's reserves. 

The Times also points out the little discussed fact that Russia's exchange reserves are the world's third largest, and, as of the end of December, amounted to $439 billion. 

Russia's bag of currency booty has grown by 14 percent since the start of the global rally in markets in March. 

This is a very interesting point in the Times' piece:

Although not officially confirmed, traders said that other emerging market central banks, including some in Asia which hold large foreign exchange reserves, have also been active in the foreign exchange market in recent weeks buying both Canadian dollars and Australian dollars.

Russia Today also reported on the pending move in December.

Months earlier, the Winnipeg Free Press was writing about this coming event.

The daily on Canada's prairie quoted John Whalley, a distinguished fellow in global economics with The Centre for International Governance Innovation, asa saying the Russian move could be a harbinger of a global shift. 

"It could indeed induce some switching into Canadian dollars from the U.S. side. It could be the beginnings of a trend that could involve global realignment."

Whalley noted the obvious, the currencies of economies that have weathered the global economic storm better, could cash in now. 

"If you look at strength in currencies around the world it is in the economies that are stable and have resources and oil," like the Canadian and Australian dollars and Norwegian krone, Whalley said.

In an exclusive with the Informant, Julian Mayo of London's Charlemagne Capital, said he wouldn't be surprised with the Russian move.

"This is part of their broad policy of diversification and hedging their bets. I wouldn’t be surprised if other countries followed suit: from a long term perspective, emerging markets’ FX reserves are overly concentrated in the greenback.  The change will happen gradually, but I’m sure it will happen."

The Winnipeg Free Press notes Russia is not alone in swooning for the loonie.  Interest in the Canadian currency has come from Latin America and Asia as well, writes the Free Press.

The Informant has touched on this topic, noting that Russia was looking to diversify into the Austrialian dollar.

The dollar is already on the outs in many former Soviet republics, if Gallup polls are to be believed. 

Earlier, Mayo told the Informant that the high-stakes game of currency diversification would go slow. 

"This high-stakes game has to be played out gradually – a dollar rout would undermine countries’ FX reserves (most of which are still in dollars) – as well as the willingness of those nations to continue to finance the US savings shortfall," Mayo explains.

Game on. 

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