Swiss franc safety
By Peter Rosenstreich
Mounting uncertainty in Europe has driven investors back into CHF. This, after steady Euro appreciation and EUR/CHF reaching the psychological 1.2 threshold, after the Swiss National Bank shifted its comment from “highly overvalued” to “highly valued” and slowed its FX intervention. The CHF title of safe-haven currency marginally eroded as geopolitical and trade tensions limited effect on investor’s appetite for CHF.
Now CHF has become regionalized: the safe haven during European risks. This new reality was highlighted by CHF strengthening during Italian elections. The concentration of European risk in the current environment has sent EUR/CHF down to 113.98. The SNB is still ready to intervene if necessary. We doubt the SNB will stand in front of a European crisis to secure CHF, but where is the pain threshold: 112, 111, 110?.
Foreign exchange markets are in a full-blown risk off trading. Extreme market pressure on Russia and Turkey has spread fears of contagion. Over the next weeks markets will turn their focus on Italy. The new government is expected to provide a budget for 2019, indicating how closely officials would stick to their expensive spending promises. Any extreme unfunded deficit spending will add to domestic turmoil and conflict with the EU.
EUR/USD at one-year low
By Vincent-Frédéric Mivelaz
At the weakest range since mid-July 2018, the single currency is facing difficult times. Rumours of a spill over on European banks of the Turkish lira dive is the main driver. According to the Financial Times, three large European banks are “particularly exposed” to the lira, as they are important lenders, though the situation is not viewed as “critical” by the European Central Bank. Following the news, the EUR/USD dropped over -0.60% in early trading, an excessive move that will most probably go the other way – at least until next week’s Italian budget publishes. Currently trading along 1.1450, EUR/USD is expected to bounce back along the 1.15 range.
This currency is a turkey
By Vincent-Frédéric Mivelaz
Today’s Turkish economic model presentation is expected to disappoint investors, as economic growth forecast declined from prior estimates of 5.50% to less than 4%. Inflation remains largely above the 5% target set by the Turkish central bank (July annual CPI: + 15.85%), a target never reached since 2011, thus casting doubt over the Turkish central bank’s independence. Accordingly, the Turkish lira continues to lose ground against major currencies. USD/TRY is falling over 6% intraday and 55% year to date. If Finance Minister Berat Albayrak (President Erdogan’s son in law) maintains an over optimistic stance by overdoing the good health of Turkish banking system, the TRY downward move should continue. Currently trading around 6, a historical high, the USD/TRY could be reach 6.20 in the short-term.