Hard-hit loonie getting vote of confidence from central banks

The Canadian dollar isn’t looking great compared to its U.S. counterpart of late, but foreign governments are buying up more loonies to keep in their currency reserves — a vote of confidence in the loonie over the long run.

Most countries stockpile reserves of other countries’ currencies in their central banks, both as a way of paying for things denominated in those countries, and as a general stockpile of wealth. As it stands, world governments currently have more than $12 trillion worth of other people’s currencies hoarded, a figure that’s increased by more than $140 billion in recent months as governments pad their rainy day funds.

Official data from the International Monetary Fund Wednesday showed that two currencies still stand out in terms of their popularity as reserve currencies — the U.S. dollar and the euro, which together make up almost 85 per cent of all the currency held in reserve on earth.

Loonie gaining ground

But after the big two, the little loonie is making waves as a unit of money that other countries like to have on hand. The IMF data shows that holdings of Canadian dollars overseas increased by almost seven per cent in the second quarter of this year, up to more than $127 billion.

That’s good enough to make Canada’s dollar the fifth most popular reserve currency on earth, behind the big two, then the Japanese yen, and the British pound.

It was only as recently as 2013 that the IMF started tracking Canadian dollars, along with Australian dollars, as reserve currencies because that year there was enough transactional activity in it to warrant paying attention. The loonie is especially in demand in the Caribbean and Latin American countries, and it’s also somewhat a factor in the international oil market.

Nomura currency analyst David Fritz says it “appears from the data that the popularity of these currencies in the mix of reserves has  been increasing.”

That’s a trend that other foreign exchange experts say is going to continue. Scotiabank’s currency strategist Camilla Sutton said the perception is that the Canadian dollar is weakening this year. But most of that is just the sudden strength of the U.S. dollar — compared to everything else, the loonie is doing just fine.

“Managers are increasing their exposure to [Canadian dollars] a trend we expect to continue as the euro depreciates,” Sutton said. “We expect the Canadian dollar to weaker further in the near term against the [U.S. dollar but] to gain against the [euro] and [yen.]”

The loonie was changing 0.07 of a cent to 89.58 cents US on Thursday afternoon, as the U.S. dollar weakened because of a report showing a decline in factory orders.

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