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Central banks usually impact their respective currencies by changing  interest rate expectations. But this is certainly notthe only way they impact: central banks hold reserves and these reserves don’t stay idle. And it’s not only them, but also global reserve managers.

The team at Credit Suisse explains  what has materially changed with the euro and why the pressure on the common currency is set to continue:

Here is their view, courtesy of eFXnews:

“After adjusting for exchange rate movements, the currency composition of allocated reserves reveals that global reserve managers sold the EUR in Q3 2014 and bought primarily the dollar. EUR’s share in total reserves fell by 1.5ppts to 22.6%.

This was the sharpest quarterly fall since 2004 surpassing the pace of EUR’s retreat from central bank reserves during the worst of the euro area crisis. The share of global reserves held in EUR is now the lowest since 2002.

USD was bought in Q3 while EUR was sold USD was the main beneficiary

It was both active EUR selling and valuation effects which drove the fall in EUR’s allocation. This suggests global reserve managers were reluctant to provide a balancing buying flow to mitigate EUR’s valuation effects and instead chose to actively sell into EUR’s slide. This contrasts with other reserve currencies where the flow data suggest global reserve managers bought to keep allocations stable. This appears to be the case for JPY, GBP, AUD, CHF and Other – while reserve managers appear to have sold into CAD’s fall.

Finally, evidence of slowing global reserve accumulation and even reserve selling should add to EUR’s troubles.”

Anezka Christovova & Bhaveer Shah – Credit Suisse

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