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Faced with rising inflationary pressure and monetary tightening in major economies, the Brazilian Central Bank increased the renminbi share in its foreign exchange reserves to 4.99% in 2021, the highest since the Chinese currency became part of the basket in 2019.
The share is four times higher than the previous year’s allocation, of 1.21%. The increase represented, in nominal terms, $13.766 billion more in assets measured in renminbi. At the same time, the representation of the U.S. dollar fell 5.69 percentage points over 2020 and stood at 80.34% in the period, the lowest since 2014. The drop is equivalent to $15.276 billion.
The share of the euro dropped as well, to 5.04% in 2021 from 7.85% in 2020, a reduction of $9.691 billion. The Central Bank did not elaborate on why it decided to reduce investments in the greenback. Yet, with high inflation and the prospect of interest rates being raised by the U.S. Federal Reserve, the prices of the main asset in the reserves (U.S. Treasury bonds) are likely to fall. In addition, inflationary pressure has also risen in the euro zone, generating the same effect on European securities.
There is even greater incentive to invest in renminbi after the United States blocked Russian investments in dollars. As a result, some economists argue that the Chinese currency is likely to gain prominence in the countries’ forex reserves.
In the report, however, the Brazilian Central Bank refers only to the profitability of currencies. According to the monetary authority, assets in renminbi have higher yields than those in dollars, although they have the same risk as the total curve of U.S. securities.
The Central Bank has also increased the share invested in sterling, to 3.47% in 2021 from 2.02% in 2020, as the United Kingdom is further ahead in the process of monetary tightening. The position in gold, another typical hedge against inflation, increased to 2.25% from 1.19%.
The monetary authority has also resumed investments in Canadian and Australian dollars in 2021. These investments were reduced to zero a few years ago because these currencies have a high correlation with the real, since they are from commodity-producing countries and have also been used by investors as a protection against inflationary risks.
Source: Valor International