22 March 217-311 Could there no longer be any credible reserve currency? We consider an extreme situation in which there would no longer be any credible international reserve currency: If Donald Trump's policies (regarding foreign affairs and regulatory and trade matters) give investors cause for concern, international demand for dollars could decrease; The euro zone's structural problems and political risks there could discourage international demand for euros; The Chinese renminbi and the Japanese yen will probably be adversely affected by their significant potential for depreciation, due to capital outflows from China and substantial growth in the money supply in Japan; The pound sterling is adversely affected by Brexit; The minor currencies (Swiss franc, etc.) cannot replace the major currencies as a reserve currency. All the major international reserve currencies could therefore become far less attractive for investors. This would lead to an appreciation of the minor reserve currencies, and a rise in precious metal prices. Patrick Artus Tel. (33 1) 58 55 15 patrick.artus@natixis.com @PatrickArtus www.research.natixis.com CORPORATE & INVESTMENT BANKING INVESTMENT SOLUTIONS & INSURANCE SPECIALIZED FINANCIAL SERVICES Distribution of this report in the United States. See important disclosures at the end of this report..
All the major reserve currencies have a problem Table 1 shows the structure of central banks foreign exchange reserves by currency. Table 1: Structure by currency of central banks' foreign exchange reserves (as %) In USD Euros US dollars JPY Pound sterling Swiss francs Other currencies* o/w Australian dollar Canadian Dollar Other 22 Q1 19.67 71.62 4.38 2.67.31 1.34 - - - 22 Q2 21.39 68.49 5.34 2.84.31 1.63 - - - 22 Q3 22.43 67.49 5.13 2.9.32 1.73 - - - 22 Q4 23.65 66.5 4.94 2.92.41 8 - - - 23 Q1 24.52 66.38 4.51 2.64.24 1.72 - - - 23 Q2 24.97 66.22 4.13 2.63.21 1.84 - - - 23 Q3 24.45 66.65 4.34 2.51.23 1.82 - - - 23 Q4 25.3 65.45 4.42 2.86.23 2.1 - - - 24 Q1 23.44 67.9 4.46 2.83.22 1.95 - - - 24 Q2 23.31 67.39 4.33 2.84.24 1.89 - - - 24 Q3 23.77 66.89 4.6 3.2.17 1.92 - - - 24 Q4 24.68 65.51 4.28 3.49.17 1.87 - - - 25 Q1 24.9 65.14 4.25 3.74.17 1.79 - - - 25 Q2 24.55 65.81 4.13 3.67.13 1.71 - - - 25 Q3 24.12 66.8 4.12 3.76.14 1.78 - - - 25 Q4 23.89 66.52 3.96 3.75.15 1.74 - - - 26 Q1 24.37 66.16 3.64 4.9.16 8 - - - 26 Q2 24.59 65.74 3.47 4.33.15 1.73 - - - 26 Q3 24.26 66.15 3.35 4.36.16 1.73 - - - 26 Q4 24.95 65.8 3.47 4.52.17 1.81 - - - 27 Q1 25.3 65.8 3.14 4.6.17 1.98 - - - 27 Q2 25.17 64.88 3.6 4.74.15 2. - - - 27 Q3 26. 63.91 2.95 4.84.16 2.14 - - - 27 Q4 26.12 63.88 3.18 4.83.16 1.83 - - - 28 Q1 26.53 62.95 3.37 4.81.15 2.2 - - - 28 Q2 26.6 62.6 3.57 4.88.16 2.2 - - - 28 Q3 25.32 64.17 3.53 4.73.15 2.1 - - - 28 Q4 26.21 63.77 3.47 4.22.14 2.2 - - - 29 Q1 25.82 65.18 2.79 3.95.14 2.12 - - - 29 Q2 27.57 62.81 3.2 4.28.12 2.2 - - - 29 Q3 27.98 61.47 3.15 4.31.12 2.97 - - - 29 Q4 27.66 62.5 2.9 4.25.12 3.3 - - - 21 Q1 27.27 61.75 2.98 4.29.12 3.58 - - - 21 Q2 26.24 62.54 3.19 4.17.11 3.75 - - - 21 Q3 26.63 66 3.49 4.5.1 4.17 - - - 21 Q4 26.1 61.84 3.66 3.93.13 4.43 - - - 211 Q1 26.47 61. 3.62 4.7.12 4.73 - - - 211 Q2 26.75 6.47 3.72 4.6.12 4.88 - - - 211 Q3 25.58 61.64 3.69 3.9.3 4.89 - - - 211 Q4 24.67 62.36 3.61 3.84.8 5.45 - - - 212 Q1 24.56 61.75 3.85 4.1.24 5.58 - - - 212 Q2 24.75 61.67 3.95 3.84.23 5.56 - - - 212 Q3 24.2 61.38 4.27 4.12.3 5.92 - - - 212 Q4 24.5 61.47 4.9 4.4.21 6.14 1.42 1.46 3.26 213 Q1 23.38 62.1 3.88 3.87.26 6.6 8 1.66 3.36 213 Q2 23.66 62.5 3.84 3.82.26 6.37 1.8 1.69 2.89 213 Q3 23.93 61.62 3.8 3.92.26 6.47 1.83 1.68 2.95 213 Q4 24.19 61.24 3.82 3.98.27 6.49 1.83 1.82 2.85 214 Q1 24.13 61.1 3.93 3.86.26 6.79 1.87 1.9 3.2 214 Q2 23.81 61.4 4.2 3.87.27 6.99 1.99 1.92 3.8 214 Q3 22.3 62.71 3.93 3.84.26 6.96 1.94 1.88 3.15 214 Q4 21.9 63.34 3.9 3.79.27 6.81 1.89 1.78 3.14 215 Q1 2.56 64.33 4.19 3.9.29 6.72 1.83 1.73 3.16 215 Q2 2.4 63.75 3.83 4.7.32 6.99 1.89 1.91 3.19 215 Q3 2.15 64.16 3.76 4.72.28 6.93 1.85 1.82 3.26 215 Q4 19.73 64.16 4.3 4.86.29 6.93 1.87 1.92 3.13 216 Q1 2.15 64. 3.9 4.77.2 6.98 1.89 1.86 3.23 216 Q2 19.98 63.84 4.38 4.65.2 6.94 1.92 1.84 3.18 216 Q3 2.29 63.28 4.48 4.5.2 7.25 2. 1.94 3.3 (*) Including Canadian dollar and Australian dollar Sources: IMF, Natixis 2
We believe that at present all the major reserve currencies (dollar, euro, renminbi, yen, pound sterling) are becoming less attractive for investors, given the problems of the countries that issue these currencies. Diminishing attractiveness of the major reserve currencies (1) US dollar The diminishing attractiveness of the dollar could be due to investor concern regarding the policies (foreign affairs, trade, migration) proposed by Donald Trump. However, looking today at dollar-denominated bond purchases by non-residents (Chart 1), we note that they have become very substantial since Trump's election. 2 15 1 5-5 Chart 1 United States: Net purchases of bonds by nonresidents (in USD bn) 2 15 1 5-5 -1 Sources: EPFR, Natixis -15 12 13 14 15 16 17-1 -15 (2) Euro The diminishing attractiveness of the euro could be due to the risk of a break-up of the euro zone perceived by investors given the euro zone's unresolved structural problems (end of capital mobility between euro-zone countries, the depressive nature of fiscal adjustments and competitiveness adjustments), and given the risk that populist parties hostile to the euro might win elections (in France and Italy). Chart 2 shows euro-denominated bond purchases by non-residents; there have been net sales since the autumn of 216. 4 Chart 2 Euro zone: Net purchases of bonds by nonresidents (in USD bn) 4 2 2-2 -2-4 -4 Sources: EPFR, Natixis -6 12 13 14 15 16 17-6 3
(3) Renminbi The exchange rate risk concerning the Chinese renminbi is high because of significant capital outflows from China which far exceed the amount of China's external surplus (Chart 3). Chart 3 China: Current-account balance and capital flows (USD bn, annualised) 1,5 1, 5-5 -1, -1,5 Capital flows Current-account balance 1,5 1, 5-5 -1, -1,5-2, -2,5-2, -2,5 (4) Yen There is a high risk of a sharp depreciation of the yen due to the extremely rapid growth in the money supply (Chart 4A) needed to prevent a rise in long-term interest rates (Chart 4B). 5 45 4 35 3 Chart 4A Japan: Monetary base In JPY trillion (LHS) As % of nominal GDP (RHS) 9 8 7 6 2.5 2. Chart 4B Japan: Interest rate on 1-year government bonds (as %) 2.5 2. 25 2 15 1 5 Sources: Datastream, BoJ, Natixis 5 4 3 2 1 1..5. -.5 1..5. -.5 (5) Pound sterling The attractiveness of the pound sterling has definitely been reduced by the Brexit vote, which significantly increased the currency s exchange rate risk (Chart 5A), given the uncertainty surrounding the UK s future economic situation in light of the very large weight of trade flows between the United Kingdom and the European Union (Chart 5B). 4
.9 Chart 5A United Kingdom: Pound/dollar exchange rate (USD 1 = GBP...).9 13 Chart 5B United Kingdom: Exports to the EU in value terms (as % of nominal GDP) 13.8.8 12 12 11 11.7.7 1 1.6.6 9 9.5.4.5.4 8 7 Sources: Datastream, ONS, Natixis 6 8 7 6 Conclusion: A positive outlook for the minor currencies and gold In our opinion, as we have seen, the attractiveness of all the major reserve currencies (dollar, euro, renminbi, yen, pound sterling) is likely to diminish significantly. This would of course be positive, as is already perceptible, for: - Minor reserve currencies, such as the Swiss franc (Charts 6A and B); - Gold, a substitute for reserve currencies (Charts 7A and B). Chart 6A Swiss franc/euro exchange rate (EUR 1 = CHF ) Chart 6B Swiss franc/euro exchange rate (EUR 1 = CHF ) 1.7 1.7 1.12 1.12 1.6 1.4 1.6 1.4 1.11 1.1 1.11 1.1 1.3 1.3 1.9 1.9 1.2 1.1 1..9 1.2 1.1 1..9 1.8 1.7 1.6 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 1.8 1.7 1.6 2, Chart 7A Gold price (USD/ounce) 2, 1,4 Chart 7B Gold price (USD/ounce) 1,4 1,75 1,75 1,35 1,35 1,5 1,5 1,3 1,3 1,25 1, 75 1,25 1, 75 1,25 1,2 1,15 1,1 1,25 1,2 1,15 1,1 5 25 5 25 1,5 1, Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 1,5 1, 5
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