EUR: IMF reserve data shows tentative return of confidence – MUFG

EUR’s share of FX reserves rebounds modestly during the second quarter, explained analysts at MUFG Bank. They point out valuation and new purchases played a role suggesting a tentative return of confidence after heavy selling in the first quarter. Renewed confidence in the euro is welcome but further tests lie ahead, analysts mentioned. 

Key Quotes:

“It provides insight into changes in FX reserve holdings up until the end of Q2 2020. For the quarter as a whole, the USD weakened broadly as it began reversing sharp gains recorded in Q1. USD weakness in Q2 was most evident against the commodity currencies of the AUD (-11.2%) and CAD (-3.5%). USD weakness was more modest against the EUR (-1.8%) and CHF (-1.4%), while it was little changed against the GBP (+0.2%) and JPY (+0.4%).”

“According to our calculations, FX reserve holders purchased around USD47 billion of EURs in Q2. It suggests a cautious return of confidence in the EUR following heavy selling in Q1. ECB policy action and the EU Recovery Fund plan likely played a role in restoring confidence in the EUR.”

“Our findings suggest reserve holders may continue to take a more hands off approach in allowing their domestic currencies to weaken as a shock absorber to the ongoing COVID crisis. It is reassuring that confidence has returned in the EUR although it could be challenged again by the resurgence in COVID cases in Europe. The stronger EUR could also act to dampen demand directly and indirectly by increasing the risk of more negative rates in the euro-zone.”