OTTAWA May 13 The increased use of the Canadian
dollar as a reserve currency may lower bond and money market
yields but may also cut into market liquidity since central
banks are less likely to trade, the Bank of Canada said in a
report on Tuesday.
The report, entitled "The Canadian Dollar as a Reserve
Currency," noted that central banks and monetary authorities had
started adding Canadian-dollar assets to their official foreign
reserves portfolios over the past five years.
"A clear reflection of Canada's relative economic resilience
during the global financial crisis of 2007-09 is the growth in
the share of foreign exchange reserves that other countries hold
in Canadian-dollar securities, particularly those issued by the
government of Canada," the central bank study said.
"The holdings of official foreign investors are likely to
remain a salient, and may become an even more important, feature
of Canadian government debt markets."
It estimated total reserve holdings of
Canadian-dollar-denominated securities at around US$200 billion,
and said that International Monetary Fund data showed that the
Canadian dollar accounted for 1.8 percent of reported global
foreign reserves in the third quarter of 2013.
The Canadian dollar started to attract increased interest
from foreign reserves managers around 2009-10, it said, pointing
to the central banks of Chile, the Czech Republic, Iceland,
Macedonia and Russia as starting investing in Canadian assets.
It noted the Swiss National Bank's decision to bump up its
target weight of Canadian-dollar holdings to 4 percent in 2010
from 2 percent previously.
Canada's share in global reserves may increase since
emerging economies allocate a higher weight to the Canadian
currency than advanced countries, 2.1 percent versus 1.6
percent, and most of the growth in reserves is expected to come
from emerging economies, it said.
Increased use of the Canadian dollar can be expected to
reduce the funding costs of the federal government, it said.
However, the secondary market turnover of securities may
decline, making it more difficult for investors to trade in
Canadian markets, possibly translating eventually into higher
(Reporting by Randall Palmer; Editing by Chizu Nomiyama)