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China’s SDR Inclusion: What Does It Mean For G10

The  Chinese authorities pushed for and received acknowledgement from the  International Monetary Fund, and the yuan is now included in the IMF’s SDR.

The rearrangement of SDR exposes one important currency which has a diminishing role.

Here is their view, courtesy of eFXnews:

On Monday, the IMF announced that China’s renminbi (CNY) will, from 1 October 2016, form part of the IMF’s Special Drawing Rights (SDR). This likely has few if any immediate implications for either the four existing G10 SDR currencies – USD, EUR, JPY and GBP – or those G10 currencies that sit outside the SDR basket, including the AUD.

What the inclusion of the CNY and re-weighting of the four currencies in the existing basket does do, is underscore the diminishing role that the euro plays in the composition of global FX reserves.

In short, the USD’s share has not changed since it remains the pre-eminent global reserve currency by a large margin (and whose share is rising). Sterling’s share should arguably have fallen further, while the even smaller fall in the JPY – bearing in mind its very small global reserves weight – might be partly a sop to Japan in acquiescing to China’s inclusion in the SDR.

IMF SDR weights 2006 2011 2016

The big fall in the euro’s share appears to reflect the reality of its role in global reserves falling not risen – a trend evident since the first Eurozone crisis back in 2011. In a world of falling not rising global FX reserves, expect Reserve Managers’ activity to remain a headwind not tailwind for EUR. This is especially so if we do see a (likely gradual) pick-up in CNY holdings.

The AUD also stands to be a potential loser in such a process, to the extent that AUD has been held in part as a CNY proxy. We don’t overplay the latter however, bearing in mind the small difference in the share of global FX reserves enjoyed by the AUD relative to the likes of CAD.

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.