In further dollar diversification news, Reuters reported on Tuesday that Russia might consider adding either the Australian or Canadian dollar to its currency reserves.
Such news would normally be considered a negative for the greenback — implying as it does some degree of a switch out of US dollars by the Russians.
But on Tuesday the dollar rose to a two-week high versus the euro, largely – it seems – because the comments were also accompanied by remarks from the central bank’s first deputy chairman, Alexei Ulyukayev, that Russia was not yet ready to reduce its holdings of US Treasuries.
According to BNP Paribas, however, dollars bulls ought not necessarily be reassured by the Treasury position.
As they put it on Tuesday, emphasis FT Alphaville’s:
Russia has suggested adding the AUD and CAD to its portfolio of reserve currencies. Russia has USD367bln in reserves which have been mainly invested into EUR and USD with minor allocations in GBP and JPY. Russia said that it would not reduce its US Treasury holdings. Nonetheless, its cash holdings with the Fed have increased over the past few months which can be converted into other currencies. In addition, incoming reserves are USD dominated (Energy is sold in USD) suggesting most of the reserve reallocation will work against the USD.
What’s m0re, if recent comments from the Australian central bank are anything to go by, there will soon be even more reason to shift out of the US dollar and into the Aussie. As BNP Paribas explain:
Generally, we expect the USD to come under renewed selling pressure this week driven by renewed liquidity outflows from the US into higher yielding environments. EURUSD near 1.4540/10 offers a good buying opportunity. The AUD rally is likely to be broad based. RBA Governor Stevens said that “the Bank has already signalled that interest rates can be expected, at some point, to move off their currently unusually low levels as recovery proceeds.” As for the timing of these eventual rate hikes, the Governor said that the Bank’s inflation targeting framework will guide interest rate adjustments. He reminded markets that rates that are too low for two long risks the creation of imbalances. Indeed, had said that “adjustments back toward more normal settings for both types of macroeconomic policy (fiscal and monetary) are what should be expected during the recovery phase of a business cycle.” These remarks will underpin expectations for a near term hike from the RBA. The combination of major CB’s remaining loose but the RBA signalling higher rates will push AUDUSD to 0.9200 by the end of this year. Upcoming strong data releases out of China will help as well.
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