* Canada, Aussie dollars to benefit from diversification
* Strong correlation with stocks could wane
* Central bank buying to check swings in these currencies
By Anirban Nag
LONDON, Dec 6 An IMF plan to list the Australian
and Canadian dollars as reserve currencies could curb swings in
their exchange rates and enhance their appeal relative to
troubled rivals such as the dollar, yen and euro.
Raising the status among central bank reserves of the two
growth-linked dollars could weaken their strong correlation with
stocks and commodities, which has seen the currencies sell off
sharply when worries about global economic health escalate.
In considering adding the Australian and Canadian currencies
to a list that includes the U.S. dollar, euro, yen, sterling and
Swiss franc, the International Monetary Fund is unlikely to
trigger a rush to buy and is largely recognising reality.
Asian, Middle Eastern and European central banks, with
trillions of dollars in reserves, have been steadily paring
exposure to the dollar and yen in recent months and increasing
holdings in the Aussie and Canadian currencies.
The risk of further monetary easing in the United States and
Japan have somewhat tarnished the appeal of the dollar and the
yen, while a three-year-old sovereign debt crisis has
made investors wary of the euro.
"With the U.S. problems and the euro zone crisis, reserve
managers are always looking at credible alternatives," said
Simon Derrick, head of currency research, at Bank of New York
Mellon. "We could see the Aussie and Canadian dollars trade more
like safe-haven currencies in the medium term."
The traditional safe havens, to which investors turn in
times of financial stress, are the reserve currencies favoured
by central banks because of their deep liquidity.
They usually move inversely with stocks and other
growth-linked assets and currencies such as the hitherto more
volatile Australian and Canadian dollars.
However, these two currencies' correlation with stocks is
showing signs of ebbing. While the U.S. S&P stock index
has lost more than 2 percent so far this quarter, the Aussie
has risen 1 percent while the Canadian dollar
has lost less than 1 percent.
In the quarter ending September 2011, when the S&P index
lost 14 percent, the Aussie fell 10 percent and the Canadian
dollar dropped 8 percent.
Global reserves have grown rapidly in the last decade, to
$10.5 trillion in June 2012 from $2.4 trillion at the end of
2002, IMF data showed. During that time, while the dollar's
share has slipped to around 62 percent, the share of "other
currencies" has risen 10 times to $310 billion.
More than 20 reserve managers have the Aussie in their
portfolios, according to the Reserve Bank of Australia, while
the Russian and Swiss central banks have been active buyers of
the Canadian dollar, traders and money managers said.
So far they have been lumped together in IMF reserves data
as "other currencies" and analysts said the plan to list them
individually reflected how well the Australian and Canadian
economies have performed during the global financial crisis.
"This largely reflects the stability of Australian and
Canadian growth and the soundness of their banking systems,"
said Damien McColough, analyst at Westpac Bank, Sydney.
This was seen making both less prone to big swings.
"Reserve managers are long-term investors and are less
likely to sell down on a short-term basis, unlike private sector
funds who will sell if risks are growing," said Ian Gunner,
portfolio manager at Altana Hard Currency Fund.
He expected reserve managers to keep buying and diversifying
into the Aussie and Canadian dollars.
While a higher exchange rate would cause headaches to
policymakers in both countries, where there has been concern
about the domestic currency's strength, the Reserve Bank of
Australia has so far played down the impact.
Even though both Canadian and Australian dollars are backed
by sound banking systems, strong public finances and high credit
ratings, investing in then is not without risks.
Their shares of daily turnover in the dominant UK market --
a gauge of their liquidity -- are in single digits, compared
with nearly 33 percent for euro/dollar, 12 percent each for
sterling/dollar and dollar/yen, a Bank of England survey showed.
Besides, an Asian slowdown could hurt the Aussie, given
Australia's strong trade links to the region. Canada is also
vulnerable to a U.S. downturn or a drop in crude oil prices.
However, the benefits for reserve managers, who seek to
preserve capital over returns, outweigh risks, analysts say.
Traders say recent steady purchases of the Aussie by central
banks has ensured it has not fallen below parity against the
U.S. dollar, despite interest rates cuts by the RBA.
"Yield-seeking and quality-seeking flows have flocked to the
Aussie. A drop to 90 U.S. cents hasn't materialised. If
anything, it is trading in a narrow range," said a chief foreign
exchange trader at an European bank.