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What Are the Implications of AUD and CAD Being Included in IMF’s COFER?

Does Anything Change For The Forex Trader

by Tsveta Zikolova

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When it comes to currencies and forex trading, the attention of traders, analysts as well as journalists is usually focused on the US dollar, the euro, the yen and occasionally, the Swiss franc. Yet, during the last few days there are two other currencies which have been in the forex market’s spotlight – the Australian and the Canadian dollars – with the reason being the announcement that the International Monetary Fund (IMF) is considering adding both currencies to its Currency Composition of Official Foreign-Exchange Reserves (COFER) database.

The news had an immediate impact on the forex market, sending both currencies to monthly highs versus the US dollar. It goes without saying that if the IMF consideration turns into an actual decision and the Australian and Canadian dollar are indeed formally classified as official reserve assets, it will boost both currencies in the short-term; however, it will be interesting to observe the long-term consequences for the Aussie and the loonie, when the impact of the news itself wears off, and if the COFER inclusion would have any impact on the way the two currencies are traded.

The Aussie & the Loonie

Both the Australian and Canadian dollars are known as “commodity currencies” alongside other currencies such as the New Zealand dollar and the Norwegian krone since they come from countries whose economy is largely reliant upon their output and export of natural resources and their value usually moves in line with the value of commodities, most notably, the price of oil.

The Australian dollar, commonly referred to as the Aussie, was introduced as late as 1966, when it replaced pounds, shillings and pence. Since then, however, the Aussie has become one of the most traded currencies worldwide and has been highly sought after following the global financial crisis on account of Australia’s AAA credit rating. Resource-rich Australia has managed to remain relatively isolated from the global economic woes and boasts an annual growth of three percent or more. In addition, the Reserve Bank of Australia (RBA) maintains relatively high interest rates, currently 3%, which also boosts the appeal of the Aussie.

As noted in a recent article by the Brisbane Times, in the past few months the Aussie has been trading within a $1.0150 to $1.0450 range. In 2011, it peaked around $1.1080, its highest level since the currency was floated in late 1983.

The Canadian dollar, nicknamed the loonie because of the aquatic bird image on the one-dollar coin, is also in the top ten of the world’s most traded currencies. As is the case with the Aussie, the appeal of the Canadian dollar was boosted in recent years, with investors viewing Canada’s economy as a safe harbour in the global economic turmoil.

Bloomberg reports that in 2012, the loonie has advanced 2.5 percent versus its US counterpart. The Bank of Canada’s key interest rate is one percent, with the bank recently reaffirming its decision to leave the rate unchanged as it has been for the last two years.

IMF COFER Overview

So what exactly is the IMF’s COFER? As already noted, the acronym COFER stands for Currency Composition of Official Foreign Exchange Reserves – the IMF’s database with quarterly information on the composition of currency reserves of central banks. Countries report the composition of their currency reserves voluntarily, with the IMF noting that currently there are 144 reporters, consisting of IMF members, non-member countries and economies as well as other entities holding foreign exchange reserves.

At present, the COFER-identified currencies include the US dollar, the euro, the pound sterling, the Japanese yen and the Swiss franc. Before the single currency was introduced, however, there were several identified European currencies, namely the Deutsche mark, the French franc, the Netherlands guilder, as well as the European Currency Unit (ECU).

What is more interesting, however, is that in addition to those identified currencies, the IMF COFER database also has one more section – the “other currencies” category – where the Australian and the Canadian dollar are already presumably included. As recently reported by the South African national newspaper Business Day, informal estimates indicate that official foreign exchange holdings in each of the two currencies are about $60 billion. The IMF itself noted that the expansion of its currency coverage to include the Australian and Canadian dollars was because the currencies in question had “a relatively high number of country reporters.”

Bloomberg in turn notes that the share of global foreign-exchange reserves denominated in “other currencies” increased to 5.3 percent in the second quarter of 2012, from two percent in 2007, with the Australian and Canadian dollar most likely accounting for the bulk of the noted increase.

COFER Status – Just a Technicality?

While some analysts have hailed the IMF consideration as evidence of the strength of the Australian and Canadian economies likely to continue to boost the appeal of both currencies, others see it as a mere technicality. In a recent commentary published on the website Seeking Alpha, Marc Chandler, Senior Vice President, and the Global Head of Currency Strategy Brown Brothers Harriman, noted that the inclusion was “technical, not substantive,” with the IMF simply considering breaking out data for the Australian dollar and its Canadian counterpart.

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