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The Safety Premium in FX

Last updated 3/19/2010 4:28 AM ET (GMT -5) 4 Comments

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Boris Schlossberg

Director of Currency Research, GFT

As the first quarter of 2010 draws to a close and fiscal deficit concerns continue to dominate trade in the market , it is worth noting that some currencies in Europe and North America are starting to carry a “safety premium” due to their better fiscal and trade balance position. 

In Europe, the Swiss economy which is running both a fiscal and trade balance surplus stands in sharp contrast to the much larger Eurozone economy next door which is plagued by massive fiscal deficit problems amongst its Southern European member states and a deteriorating current account condition. Yesterday,  the EZ current account slipped into the red printing at -8.1B versus 2.9B eyed. Little wonder then, that EUR/CHF is on the verge of hitting all time lows as the pair continues to trade in the 1.4300’s in today’s Asian session trade.

Similarly in North America the Canadian economy’s balance sheet position is far superior to that of is neighbor to the south. Not only has Canadian trade returned to surplus in 2010 after recording its first deficit in decades in 2009, but the Canadian budget gap is minor relative to that of the US. In 2010 the Canadian fiscal deficit is projected to decrease to C$49.2 Billion from C$53.8 Billion the year prior, remaining less than 4% of the GDP. Contrast that with US budget deficit which is expected to exceed $1 Trillion or approximately 10% of GDP.

Ironically enough both the Swissie and the loonie carry very low yields of only 25bp and the SNB and BOC have tried to do everything in their power to dilute the value of their respective currencies as authorities in both countries are increasingly concerned about the competitive positions of their export sectors. The SNB has intervened in the market on numerous occasions as it tried to maintain EUR/CHF at 1.5000, but has since given up on its targets and is now simply content at managing the decline in the pair in an orderly fashion. The BOC made multiple references to the strength of its currency  over the past several months and although Canadian monetary officials are loathe to see the loonie reach parity with the buck they are becoming resigned to such a possibility.

In short  the currency market continues to reward both Switzerland and Canada for essentially running a “clean book” of business with respect to their trade and fiscal affairs. If sovereign debt issues remain a major concern for investors in 2010, the current trends in EUR/CHF and USD/CAD are likely to continue despite the best efforts of the Swiss and Canadian officials to slow down the rally in the Swiss franc and the Canadian dollar.

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Comments (4)

FXDragon

March 19, 2010 at 05:10 AM ET

Why do you think aussie is slower than franc and cad on strength?

bschlossberg

March 19, 2010 at 05:25 AM ET

Fears over China and a large TB deficit

FXDragon

March 19, 2010 at 06:57 AM ET

I thought Australia was exporting well to China. Where does the deficit come from?

Demax

March 19, 2010 at 05:21 AM ET

I fully agree with you on this one, Boris.

There's still a great case to be made for holding cash, but you have to cast a wide net to find the right cash to hold!
Only others worth consideration are NOK (but small economy) or that high yielder down-under (but that's looking toppish to me).

I'll persevere with the swissie, I'm sure the SNB may surprise us all when it's least expected but what the hey, if you can't have a bit of fun with your hard-earned - well, it would be boring..wouldn't it?

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.