As the swelling debt burdens of the US and the European economies have increasingly taken a toll, sovereign forex reserves keepers are gradually reducing their traditional reliance on the US dollar and the euro, by increasing their bets on the so-called "commodity currencies" to capture the rising trend of the commodity boom that can bring investment returns.

One forex analyst said that the traditional "commodity currencies", such as the Australian dollar (aussie) and the Canadian dollar (loonie), may be included in many investment portfolios for the sake of diversification because of their strong macroeconomic fundamentals.

The Russian Central Bank disclosed for the first time in June that it has bought loonies, but added that it has not yet begun operations with the currency. It added that it is considering purchasing aussies to diversify assets in its forex reserves.

Russia possesses the world's third largest forex reserves, which amount to $458.02 billion as of June 2010.

Russia's moves may prompt other countries with similarly huge forex reserves to diversify their holdings. China, which has the world's largest forex reserves of $2.44 trillion as of March, could also buy the two currencies in diversification efforts.

China could also buy more loonies and aussies because it has been accumulating stakes in resource firms in these two countries, in the hope of securing uninterrupted supplies of commodities to support its economic growth.

"The Chinese authority may also add Australian and Canadian dollars to its forex reserves to send a market warning signal to the US. However, as the market liquidity of these two currencies is still limited, the Chinese government cannot substantially add these two currencies into its forex reserves," Success Wealth Management Executive Director Barry Doo told China Daily.

However, Doo sees great potential in investing in these two currencies because of their higher interest rates over those of other key currencies, as well as their brighter economic prospects.

The US Federal Reserve signaled overnight that it will keep its benchmark interest rate unchanged in the range of zero to 0.25 percent for an "extended" period, saying "economic conditions have become less supportive of economic growth", an obvious departure from its April language that stated "the economy continued to strengthen." Market interpretations now see reduced chances for a rate hike in the US this year.

"The loonie and the aussie enjoy an interest rate advantage as the aussie is a high-yield currency, while Canada is entering a rate hike cycle. The US and the euro zone area are unlikely to raise interest rates until 2011, highlighting the prospect that the loonie and aussie can bring better investment returns," Doo noted.

"Moreover, the financial systems of Canada and Australia have been less affected by the financial crisis of 2008, because these systems had less exposure to subprime and credit default swap products. Households in Canada and Australia are not as indebted and leveraged ... as American households are. These two currencies are well supported by good macroeconomic fundamentals," Doo observed.

Doo predicted that adding the loonie and the aussie dollar to the forex portfolios will be a sound diversification strategy because of the high yields.

"The loonie and aussie should occupy 40 percent, the greenback assets should represent 40 percent, and the remaining 20 percent should lie in the renminbi for appreciation potential," Doo suggested.

China Daily

(HK Edition 06/25/2010 page3)