Gavekal Capital: Central Banks Eschew Euro Holdings

Thursday, October 9, 2014

Central Banks Eschew Euro Holdings

According to the most recent data available, the IMF estimates that central banks around the world shifted quite a few of their reserves out of the euro in Q2.  While Europe's common currency as a proportion of total reserves has remained fairly constant over time, last quarter's decline is the second largest since the euro's inception.

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What may have precipitated such a large shift?  Perhaps central banks are not too keen to pay interest on those euro-denominated assets--a condition imposed by the ECB when it cut its Deposit Facility interest rate to -0.10 in early June.

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A second cut to the deposit rate in September--combined with short-term yields in a number of European countries falling below zero--would not seem to bode well for a reversal in central banks' preference for holding euros.

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