Research Team at Nomura, suggests that the inclusion of Chinese reserves data into COFER makes it difficult to follow what FX reserve managers are doing, while increasing expectations on the allocation of the Chinese reserves portfolio. Key Quotes “If China underweights EUR and overweights GBP there may be expectations about EUR/GBP buying in the medium term. However, if this is the case, China’s current allocation may be viewed as adequate (by itself). In addition, we cannot rule out that there was a historically high pace of reserve rebalancing from EUR assets to GBP assets from Q2 2015 to Q4 2015 by reserve managers, based on flow analysis. Consequently, it is unclear whether China has underweighted EUR. Although one could conclude that the Chinese reserve portfolio has underweighted JPY by about 3% based on Q3 2015 data, the updated JPY share shows no signs of underweighting. We think drawing strong conclusions about Chinese reserve flows from COFER is hazardous. BoP data still show relatively large foreign selling of euro area debt securities from non- US and non-Japanese investors and foreign reserve flows may not be clearly EUR positive yet. A large part of foreign flows into Japanese fixed income products are also likely on an FX-hedged basis too. The mid-term flow picture remains EUR and JPY negative against USD.” For more information, read our latest forex news.