Barclays on FX reserves
Barclays Capital FX Strategy Research discusses the possible impact of the rebalancing of the EUR reserve managers on EUR/USD over the coming months.
Barclays argues argues that the simple expectations for EUR reserve shares to return to their previous highs neglect to recognize the shocks that EM reserve managers experienced in recent years and their response to them.
"We find more evidence that rebalancing towards mandated asset allocations and long-run investment behaviour by reserve managers likely will make them an impediment to further EUR strength, not a source of support.
Thus, the evidence would suggest that FX reserve managers likely will work against further EUR appreciation, not support it. Based on their recent behaviour, there seems little reason to expect them to undertake a significant active change in their asset allocations in favour of EURs, their most consistent behaviour is to rebalance reserves against currency momentum, and on the margin they appear less likely to allocate to low yielding currencies that do not offer long-run fundamental value," Barclays argues.
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