The Currency Composition of Official Foreign Exchange Reserves or COFER Report, is the most useful public source of data relating to central bank reserve allocations. The report is published by the IMF quarterly, and can be downloaded from the institution’s website.
The report covers the reserve composition of 149 nations, divided into the three categories of “world”, “advanced economies”, and “emerging and developing economies”. Reserve composition of reporting central banks in each category is then detailed further into the following items.
- Total Foreign Exchange Holdings: This item states the sum of the “allocated” and “unallocated reserves” categories, recording the total reported FX holdings of all central banks in IMF statistics.
- Allocated Reserves: This section is further decomposed into claims in a particular currency. Reported currencies are the USD, JPY, GBP, the Euro, CHF, and the “other” category. For historical and record keeping reasons, claims in the former Deutsche Mark, French Franc, the Netherlands Guilder are also covered until 1999. The “other” category includes any currency that is not covered explicitly, such as the Australian, and Canada Dollars, the Russian Rouble, Brazilian Real, and gold.
- Unallocated Reserves: This item records FX reserves of central banks reporting to the IFS (IMF’s “International Financial Statistics” publication), but not to the COFER, the currency composition of which is therefore unknown.
Past data is revised at the publication of each quarterly report.
Interpreting the Data
Although COFER is a very valuable tool for forex analysis, it is usefulness is limited by a number of factors. First, the currency composition of each central bank is confidential. The report only provides aggregated data on the total reserves of all reporting central banks, and can be skewed in consequence of factors affecting a limited number of central banks. Second, since information is submitted to the COFER report on a voluntary basis, the data cannot be used as a random sample of central bank reserves. The ratio of reporting central banks to non-reporting banks is highest for Europe and the Western Hemisphere.
There are two ways in which we can exploit COFER data for analysis. By examining the growth of overall forex reserves, we can gain an idea on the dynamism of global trade, and the growth rate of global imbalances as international claims increase with rising central bank reserves. One can regard each dollar in a central bank’s coffers as a claim on another nation’s economy, and the larger these claims are, the greater international imbalances must be. Also, by analyzing the currency composition of global reserves, we can acquire a longer term understanding of forex trends, since currencies with an increasing proportion of overall central bank reserves, that are actively acquired for diversification purposes, are very likely to appreciate over the longer term. This is a consequence of the fact that, since international trade is mostly conducted in U.S. dollars, central banks end up with an excess of the U.S. currency, but prefer to reallocate a proportion of reserves to other currencies for diversification purposes.
The main disadvantage of the COFER report is that its coverage is weakest for Asia and Middle East/Africa, where exporter nations with the largest forex reserves tend to be clustered. Another problem is that, although coverage of currencies like the Euro or the USD is very good, information relating to reserve items like gold is not a part of the data breakdown. On the other hand, there is no other public report that covers the central bank segment of the forex market as comprehensively as the COFER report does. Speculation about the death of the USD, for example, can easily be checked by referencing COFER data. It is, in short, a highly-valuable piece of data, the interpretation of which is, to an extent, subject to the commentator’s bias.