Charles St-Arnaud, Research Analyst at Nomura, suggests that FX intervention by EM central banks is likely behind some of the record selling of Canadian bonds by EM countries. Key Quotes “Non-residents reduced their holdings of Canadian securities by C$1.4bn in December, after increasing their holdings by C$2.9bn in November. The buying was concentrated in bonds (-C$6.8bn), while there was also some buying of money-market instruments (C$2.7bn) and equity (C$2.6bn). The decrease in bond holdings was in government bonds (C$5.2bn), mostly federal government instruments (C$5.2bn), and corporate bonds (-C$1.5bn). The flows into corporate bonds were interesting, as flows into public corporations were negative (-C$3.1bn), while flows into private corporations were positive (C$1.6bn). The buying of money-market instruments was mainly in corporate instruments (C$1.9bn), while there was selling of federal government instruments (-C$2.2bn). Some of the weakness in government-issued instruments partly reflects seasonal patterns that see negative net issuance on the month. On a regional basis, the selling of bonds was mainly from the UK (-C$5.1bn) and EM countries (-C$3.8bn), while there was some buying from other EU countries (+C$2.8bn). This is the fifth consecutive month of selling by EM countries, with selling totalling C$9.6bn, and the biggest monthly change on record. Foreign purchases of Canadian assets have been weak since May, if we exclude the strong inflows in October. The record selling of Canadian bonds by EM countries is interesting as it likely to be the result of FX intervention by various EM central banks in recent months. This is likely to continue in coming months. The data also show that foreign appetite for CAD-denominated bonds has weakened further in recent months and that most of the inflows into Canadian bonds were in bonds issued in currencies other than CAD and USD. With oil prices remaining under pressure and CAD depreciating again, flows are likely to remain weak in coming months.” For more information, read our latest forex news.