FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that according to the Bloomberg survey this year the market is forecasting an 8% of GDP current account surplus for Switzerland and a balanced budget deficit.
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“While the growth rate is sluggish and unemployment rate is travelling in the wrong direction (not helped by currency strength) it is still expected by the consensus to be at a very moderate 3.6% this year. Added to the attractiveness of the CHF are credible legal and government systems combined with good levels of liquidity.
The SNB, however, is not the only central bank for whom policy decisions are complicated by safe haven demand for its currency. This year’s dramatic movements in Chinese asset markets and ongoing fears about the pace of growth in China and commodity producing emerging markets have taken a heavy toll on risk appetite.
The JPY is the best performing currency in the year to date and the USD, EUR and CHF are all on the leader board as a consequence of their status as safe haven currencies. US fundamentals are still characterised by twin deficits though both the budget and current account deficit have shrunk markedly in recent years. What the USD lacks in terms of surpluses, however, it arguably makes up for in liquidity and perhaps by the possibility of higher yields compared with other safe havens.
In view of the fact that the Eurozone is still trying to shake of the mantle of crisis, the EUR may not seem like a natural safe haven asset. That said, the Eurozone maintains a large current account surplus and this gives the EUR the characteristics of a safe haven. The extremely low level of interest rates maintained by the ECB has ensured that the EUR is used as a funding currency for carry trades. This type of investment, however, is only popular when levels of risk appetite are elevated and volatility is low.
If elevated levels of risk appetite mean that investors are likely to be reluctant to short the EUR this year, the same reasoning could apply to the JPY. Short-covering has driven the JPY higher this year as investors exit ‘risky’ trades in the region. Clearly the Chinese authorities have taken action to stem the outflow and this has allowed the JPY to soften this morning.
However, it is our view that the risks stemming from China this year will be enough to keep volatility levels heightened. Even though JPY strength vs both the USD and the CNY increases the risk that the BoJ may be forced to response with an increase in monetary policy accommodation, we have tempered our forecasts for USD/JPY this year and now see the currency pair as recovering to just 119 on a 3 mth view.”
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