Gary Smith, head of central banks, supranational institutions and sovereign wealth funds at BNP Paribas Investment Partners, has written a special guest blog for Macroscope in which he argues that central banks should consider ways to hedge their FX reserves against the crisis.
Five things to think about this week:
– Nominal bond yields have risen across the curve, while term premiums and fixed income volatility are higher in an environment of uncertainty about how central banks will exit from quantitative easing policies once recovery takes hold. Bonds have turned into the worst-performing asset class this year according to Citi and none of the factors which markets have blamed for this are about to disappear. Curve steepening seen in April/May has started to reverse and whether it continues is being viewed as a more open question than whether yields head higher still.
All this talk about ditching the dollar as world reserve currency may be irrelevant — central banks are already walking away. The latest International Monetary Fund figures show dollar share of world FX reserves falling to 64.0 percent in last year’s fourth quarter from 64.4 percent the previous quarter. Doesn’t sound much, but at that pace dollar is less than half of world reserves in less than a decade. years. It was the same for once mighty sterling. The pound’s share dropped to 4 percent from 4.5 percent. The euro rose 1 percentage point to 26.5 percent.