G10 FX Weekly Euro safe-haven?
Group Economics Macro & Financial Markets Research Georgette Boele, tel,+31 20 6297789
27 August 2015 • • • •
The euro as safe haven currency? No it’s a funding currency The US dollar is still a safe-haven currency with a cyclical touch… …while the yen is a safe-haven and funding currency We have made some adjustments to our near-term forecasts
Euro as safe-haven currency?
Second, the US dollar has had some cyclical weakness. When
This week the euro strengthened sharply against the US dollar
US inflation came in below-expectations and FOMC minutes
during the turmoil on equity markets on so-called Black
were seen as more dovish investor sentiment sharply scaled
Monday. This triggered reports that the euro is now a safe-
back expectations about Fed rate hikes this year. As a result
haven currency. We disagree with this interpretation. Below we
the US dollar fell versus the euro.
explain why. In short, the reason for the EUR/USD rise on Monday was a What are safe haven currencies?
cut back of positions (unwinding of carry trades) combined with
Safe-haven currencies are currencies that investors flea to
cyclical US dollar weakness. In our opinion, safe haven
when they are concerned about a very negative development
demand has not been behind the surge in EUR/USD.
in financial markets. Therefore, these currencies have a strong tendency to rally when investor sentiment deteriorates (for
Is the US dollar still a safe-haven currency?
example on higher equity volatility and Emerging market CDS
We judge that the US dollar is still a safe-haven currency but
spreads). In addition, they have a strong negative relationship
the US dollar’s character is versatile and can shift to being
with 10y US Treasury yields. US Treasury bond yields in
more cyclical in certain periods. The US has the deepest
general drop in case of risk aversion. Moreover, they tend to
financial markets and the US dollar is the most liquid currency.
rally when domestic stock markets tank. They tend to be
In addition, it is the number one currency in foreign exchanges
widely traded. They have a high share in international currency
reserves. It was the ultimate safe-haven currency at the height
reserves. Furthermore, these are currencies of countries that
of crises where the global financial system is being questioned,
have deep and liquid financial markets.
like it the 2008 global liquidity crisis. Its behaviour in relation to other financial markets is less clear than that of the Japanese
Is the euro a safe-haven currency? No it’s a funding currency
yen. The dollar’s character is more versatile. It can also
Has the euro risen because of safe-haven flows? We don’t think
behave like a cyclical currency and react on Fed rate hike
so. The EUR/USD has risen for two reasons. First for some time
expectations and the strength of the economy as we have
now, financial markets were short the euro and long US dollar
seen now for quite some time.
because of monetary policy divergence. Investors had set up carry trades with the euro as the funding currency. In general,
Japanese yen is a safe-haven and funding currency…
in periods of positive investor sentiment, investors build up
Currently the Japanese yen is the ultimate safe-haven
positions that lock in interest rate spreads. For example they
currency in terms of behaviour. It has a strong positive
short a currency with low official rates and of countries with
relationship with equity volatility, and strong negative
central banks that are no-way close to tightening monetary
relationships with Nikkei and 10y US Treasury yield (see graph
policy. On the other hand, they search for currencies that pay a
below). What is more, the yen is a liquid currency and
higher interest rate. The choice of funding or carry currency
Japanese financial markets are deep. In addition, the yen is
depends to a high extent on the behaviour of its central bank,
also a funding currency because the monetary policy by the
the trend in a currency and the currency volatility. If this
Bank of Japan. During the recent market rout, the yen was the
combination is not attractive there is a lower tendency to set up
clear outperformer. This outperformance was mainly due to the
carry trades. When investor sentiment deteriorates the
closing of yen short positions. However, its safe-haven status
opposite happens. Therefore, the euro rallied versus the US
has also given support.
dollar because some of these short positions were closed.
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G10 FX Weekly - Euro safe-haven?
JPY TWI versus risk indicators
Adjustments in near-term forecasts The recent market rout has resulted in an adjustment in our
90-day rolling correlation
near-term currency forecasts (September). Although our base
1.0
case is for a Fed September rate hike, the risk has increased significantly that the Fed delays further. Even if US economic
0.5
data continue to be strong and the Fed would hike interest rates in September, parity in EUR/USD will unlikely be reached
0.0
in September. Therefore, we have made some adjustments. -0.5
The risk has also increased that the ECB may step up QE. However, we will expect to see parity in EUR/USD if investor
-1.0 07
08
09
JPY vs Nikkei
10
11
12
JPY vs VIX
13
14
15
JPY vs 10y US
sentiment improves, US data come in strong as we expect and monetary policy divergence is on again. As a result, we keep our parity call for December.
Source: Bloomberg, ABN AMRO Group Economics
ABN AMRO major currency forecasts In the future, the character of the yen could change. For example if the Bank of Japan were to start a more aggressive tightening cycle than other major central banks (now unthinkable), the yen will likely more behave as the US dollar currently behaves. This is because it would because a safehaven currency with a cyclical touch instead of a safe-haven and a funding currency. In such an environment, the yen would weaken in environments of modest risk aversion and strengthen if investor sentiment improves or if there is a global full-blown across markets panic.
EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD NZD/USD USD/CAD EUR/SEK EUR/NOK EUR/DKK
27-Aug Q3 2015 Q4 2015 1.1334 1.00 1.05 120.18 125 128 135.98 131 128 1.5482 1.49 1.48 0.7298 0.67 0.71 0.9537 1.10 1.04 1.0774 1.09 1.10 0.7110 0.72 0.70 0.6442 0.65 0.63 1.3222 1.34 1.36 9.5675 9.50 9.50 9.4099 9.25 9.00 7.4633 7.46 7.46
Source: ABN AMRO Group Economics
Q1 2016 1.05 130 137 1.52 0.69 1.05 1.10 0.69 0.62 1.38 9.50 8.50 7.46
Q2 2016 1.05 135 142 1.50 0.70 1.07 1.12 0.67 0.60 1.41 9.50 8.25 7.46
Q3 2016 1.10 135 149 1.51 0.73 1.04 1.14 0.65 0.59 1.43 9.50 8.00 7.46
Q4 2016 1.15 135 155 1.51 0.76 1.00 1.15 0.64 0.58 1.45 9.50 8.00 7.46
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G10 FX Weekly - Euro safe-haven?
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