Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 11th of July.
Safe havens are fighting back!
No one, including currency, bank, asset, institution or company, wants to be a safe-haven these days. Denmark and Switzerland are fighting it tooth and nail. The handful few that are remaining have become outrageously over-valued, creating a problem for the investors. Whenever they run to a safe-haven, the authorities slam the door; or it turns into a big bubble.
Recent turmoil in Europe has changed the perception of safe havens. Take the case of Switzerland. Investors had purchased vast amounts of Swiss francs perceiving it to be a safe haven since the country has a reputation for political and financial stability. Situated right at the heart of Europe, it possibly has more banks than you can count. The result? From 1.6 Swiss Franc per euro last year it has soared to 1.21 now. Don’t be surprised if it achieves parity by the year end.
Quite expectedly, the central bank has fought back. The Swiss National Bank sold 80 billion Francs in a single month to halt the appreciation, making it clear that it no longer wants to be the safe haven. Investors then started flocking the Danish krone since the currency is linked to the euro. So you get the advantages of holding some of your assets in euros without worrying about a break-up in the next few weeks/months. However, with a population of 5.5 million, the economy can’t absorb hundreds of billions without blowing up. The Danish central bank stepped in, cutting the key interest rate below zero to deter investors.
Or take the case of German bonds. Two-year yields turned negative recently, meaning investors literally had to pay the Germans to accept their money. Or take the case of London real-estate, another perceived safe-haven asset. Property prices have jumped 35 percent in the last three years and can only be compared to Hong Kong and Monaco now, creating massively over-valued bubbles.
So as soon as something becomes a haven, either you pay insane prices or authorities jump in to halt the progress.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2655
GBP/US$ – 1.5526
GBP/CHF – 1.5201
GBP/CAN$ – 1.5844
GBP/AUS$ – 1.5175
GBP/ZAR – 12.6822
GBP/JPY – 123.20
GBP/HKD – 12.0429
GBP/NZD – 1.9504
GBP/SEK – 10.824
EUR: The single-currency weakened against the cable yesterday to touch a new 3-1/2 year low of 1.2669 while the EUR/USD pair dropped to a new two-year low at 1.2233, despite Spanish and Italian bonds coming off their recent highs and EU finance ministers agreeing to offer €30 billion to Spain to help the country recapitalise its struggling banks. The euro’s weakness was attributed to the delay in ratification of the European Stability Mechanism by German lawmakers. The better than expected UK manufacturing and industrial data increased the allure of the pound as investors purchased cable to diversify their currency holdings. The economic data calendar is light on the ground today and markets will stay focused on the evening’s FOMC minutes release.
USD: The cable rallied against the greenback in early trade yesterday to touch 1.5550 but failed to hold on to the highs and the GBP/USD pair gapped lower to 1.5478 as the EUR/USD pair tumbled to a fresh two-year low. Sterling was weakened further after Bank of England Governor Mervyn King said chances are slim that the UK economy will recover any time soon. The dollar index – a measure of the greenback’s strength against six global counterparts, remained elevated as risks broadly remained off the table for the day. There’s not much tier-1 economic data due today and markets will stay focused on the FOMC minutes due from the other side of the pond today. GBP/USD opens at 1.5538 today morning.