Central banks in countries that have attracted people trying to seek shelter in their currency have sent a firm message: only a limited number of investors are welcome here.
That has left investors hunting for havens outside the US dollar, which has attracted huge inflows this year from those looking for somewhere liquid to park their cash.
But analysts say that there are fresh haven opportunities in 2012. They point to the Norwegian krone and the Canadian dollar as among those currencies that could do well in times of market stress.
New currency havens next year would be welcomed by investors who have this year found themselves thwarted by unexpected foreign exchange interventions.
For the first half of the year, the yen and the Swiss franc were seen as ideal. Haven currencies – also referred to as “hard” currencies – are usually those that are backed by stable governments and economies. Strong exports and current account surpluses, which Japan and Switzerland possess, are key factors as they are likely to shore up demand for a currency.
But following the market turmoil over the summer, the demand for the yen and the franc grew so high that the Swiss National Bank and the Bank of Japan took steps to weaken their respective currencies.
Alarmed by the rate at which foreign money was flooding in from investors concerned about the escalating eurozone crisis, the Bank of Japan embarked on its biggest monthly foreign exchange intervention in eight years in August. That sent the yen, which had risen more than 5 per cent against the dollar since January, tumbling nearly 5 per cent in one day.
The move was welcomed by the country’s exporters, who had been complaining that a strong yen was harming trade. But foreign investors were undeterred. The central bank sold more yen on October 31 after the currency hit its strongest ever level against the US dollar.
Then, on September 6, the Swiss National Bank said it was prepared to buy euros in unlimited quantities to weaken the Swiss franc, effectively pegging its currency to the euro. Markets opted not to test its resolve.
Investors instead began looking for the next best haven. Some have pointed to Norway, a big oil exporter with a current account surplus.
Indeed, HSBC’s currency analysts argue that the krone is “in a league of its own” against other G10 currencies due to Norway’s strong economic fundamentals.
But others have raised concerns over liquidity. Investors this year have prioritised liquidity above most other factors, fearing that any “lock down” in markets will leave them unable to get their cash out quickly and return it to shareholders or other investors. That explains why the US dollar has been the ultimate haven this year.
Trade in the Japanese yen accounts for 19 per cent of the $4tn a day foreign exchange market. Trade in the Swiss franc is more than 6 per cent. In the krone it is just 1.3 per cent, according to the latest data available from the Bank for International Settlements.
“The main problem is finding something that has all the constituents of a safe haven,” says Simon Derrick, currency analyst at BNY Mellon. “The thing that everyone forgets is liquidity.”
The pound is another contentious haven. Sterling has tended to strengthen this year when the euro weakens, as the UK economy has looked in better shape than that of the eurozone. But if the outlook for Europe deteriorates significantly, the UK is very exposed through its trade links. That has led some to label the pound a “bogus” haven.
Others believe the Canadian dollar could come to the fore. The so-called “loonie” is backed by a politically stable country, with large reserves racked up by the central bank. On the downside, it is traditionally referred to as a commodity currency because of its oil exports, making its performance closely tied to that of the global economy. Its strong trade links with the US also make it susceptible to any weakening in the US economy.
However, Simon Derrick, currency analyst at BNY Mellon, argues that those who believe the US dollar will be a decent haven next year should consider diversifying into the Canadian dollar, as that should rise against other major currencies if the US dollar does well.
Investors hopeful of less government intervention to weaken currencies next year could be disappointed. The SNB believes the franc is still significantly overvalued. Many analysts believe the central bank will still adjust the ceiling at which it will buy euros to weaken the franc again next year.
The Bank of Japan is also widely expected to take further action, though in the past intervention has not managed to weaken the yen for more than a few days due to the vast size of the market. As a result, many analysts still believe the yen will be a key haven next year.
But most agree the US dollar will remain the least contentious haven for 2012. “The anticipated relative outperformance of the US economy, especially if continued to be supported by fiscal and monetary policy, is expected to provide continued support for the dollar in the coming year. We maintain our view that the dollar and the yen will be the top performers among the G10 in 2012,” says Morgan Stanley.
Source: http://www.ft.com/intl/cms/s/0/3fc72532-2d78-11e1-b985-00144feabdc0.html?ftcamp=rss#axzz1i2eOMioF
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