Managing exchange rates and reserve diversification adds complexity

Countries are trying to better manage their currencies which adds more complexity to FX trading.

Former central banker Carlos Eduardo de Freitas commented that Brazil should cut reserve purchases now that the real has declined in value. If the currency appreciates, increase reserve buying. If the currency weakens, throttle back the purchases. This will attempt to smooth volatility.

Jim Flaherty, Canada's Finance minister states that he would not be surprised if China and Russia diversify reserves into CAD. Russia last month stated that they would buy CAD for reserve diversification. However, the Bank of Canada suggests that a strengthening CAD may be a risk to growth. China has been interested in Canadian commodity companies. This is a similar play to what has been going on between China and Australia. Russia has also been interested in AUD for reserve diversification.

Along with the currency reserve diversification story in Canada, there also is a better balance sheet than many other developed countries which makes it a good sovereign for central bank reserves. Canada interest rates are in line with the US although slightly lower. CAD has rallied slightly this month.