• Home ::
• Technical ::
• Forex Forecasts ::
• FX Strategy

• Send
• Print
• Add To
• Rss

FX Strategy

e717a001-4312-4692-9d4c-80f06eadd1c2

0

0

Why defensive currencies are still your friends

Tue, Oct 7 2008, 12:55 GMT
by Kasper Kirkegaard, John Hydeskov

Danske Bank A/S

Summary: FX markets have experienced pronounced shifts on the back of the worsening financial crisis. From implied volatilities we note that investors expect FX movements to remain substantial in the coming months (see chart 1). In this note we answer two essential FX related questions: 1) How should we inter-pret the approval of the US Troubled Asset Relief Programme (TARP) in relation to European govern-ments’ attempts to ensure financial stability? Here we conclude that EUR/USD can fall further. 2) Are re-cent FX movements (stronger JPY, USD and CHF) overdone, and will we see a retraction soon? By revisit-ing both short- and long-term models we find that the answer is ‘no’, and argue that we can see a further strengthening of safe-haven currencies.

US on least-wrong course: One week ago we outlined the possible implications of the US TARP (What does TARP mean for FX?), which was finally approved by the House of Representatives last Friday. The substance of the package is essentially the $700bn to purchase assets for which no liquid market exists. If the TARP works, it will price the assets above current fire-sale values and provide a safety net to trou-bled US banks. Fears persist, however, that the bail-out plan still is not enough to ensure stability and re-store trust among banks. It is important to emphasise that the plan cannot fully prevent an economic slowdown in the coming quarters, but it does establish a market for so-called toxic financial assets. We retain our positive stance towards TARP, as the US authorities have shown a real dedication to resolving the financial crisis and limiting the damaging impact on the real economy. On the back of the far-reaching US measures, the USD prospects look relatively positive.

Euroland trying to find its legs: The financial crisis in Europe is worsening and the growth outlook is very dim. With regards to nationalising collapsing or ailing financial institutions, the UK took the lead, first with Northern Rock and later with Bradford & Bingley. Over the weekend, Germany’s government and financial institutions agreed on a €50bn rescue package for Hypo Real Estate, a commercial property lender, while BNP Paribas, France’s biggest bank, took control of Fortis bank after the governments of Holland, Belgium and Luxembourg failed to ensure its stability. At this stage, a joint euro-area financial rescue package ap-pears far off, simply because the euro area is not designed to deal with such issues on a supra-national level. It seems, in our view, more likely that governments will deal with the problems on a national level – as already has been the case in Ireland, Italy, Portugal and Greece – where governments have guaranteed deposits and bank liabilities. One result could be uneven financial conditions across Europe. It seems in-evitable that the euro zone will sink into recession: the economy shrank 0.2% in Q2 and most indicators point to another quarter of contraction. We are not positive on Euroland growth in 2009 either, and fore-see growth of just a modest 0.7%. We find it hard to believe that the EUR will stay overvalued, with finan-cial conditions not yet clarified and the economy facing a full-scale downturn. We remain therefore nega-tive on the EUR.

• Download full FX Strategy with charts

Published on  Tue, Oct 7 2008, 13:24 GMT