Europe’s tale of two currencies couldn’t be more different

PARTS of Geneva may now be starting to look like Fulham as bankers and fund managers flee there to celebrate the manyfold merits of the UK’s 50 per cent income tax rate. The Swiss treasury, probably progressive taxation’s biggest champion, had also seen its franc strengthen. Its status as a haven currency was recently underlined by purchases by hedge funds and the big players in the money market as oil prices and the events in Christchurch sent volatility indices northwards. And although one may have thought that Swiss jobs would be taken by London financiers and their families, the Swiss economy is indeed strong: Switzerland’s unemployment rate fell in February, dropping from 3.5 to 3.4 per cent.

But though things may have been looking rosy in the land of clocks and toblerones, the Swiss franc has recently dropped off against the dollar. The strong performance as a result of flight into the franc abated once wild speculation as to the direction of oil was tempered by the Organisation of the Petroleum Exporting Countries (Opec) signalling that it would increase oil production in the face of the disruptions caused by events in Libya

According to Ian O’Sullivan at Spreadco, the reduced flows into the Swiss franc are most likely just a tailing off of risk perception as things got a little less wobbly in the MENA: “as people sit watching CNBC and Bloomberg flash images across their screens of riots in the Middle East, they start trying to shore themselves up with the franc. After the initial surge, the momentum traders who are looking at the short term will start taking profit.”

In his regular column, Boris Schlossberg at GFT was asking last week why we had yet to see flight into the dollar despite continued turmoil in the Middle East, concerns over the Irish rescue deal and fears over rising commodity prices. Had the dollar lost its safe haven attraction? But Tuesday saw the dollar climbing to a nine day high against the franc. We have started to see that the answer was that we were seeing only short term flirtation with the franc before the strong flows of petrodollars drove the dollar back up. A real fightback from the dollar came on the back of an announcement by Kuwait’s oil minister Sheikh Ahmad Abdullah al-Sabah that Opec would be in talks with a view to ramping up oil production for the first time in two years.

The Swiss franc was also down at the start of the week against the euro, with euro-franc rising 0.28 per cent to hit 1.2981 on Tuesday.

The European single currency has also somehow managed to see a steady ride against the dollar. Despite the currency being thrown into a hessian sack and knocked around the room with the blows of one bailout and debt crisis after another, it has still seen consistent gains against the greenback. Although the euro has benefited from petrodollar countries trying to diversify their currency holdings, the euro has largely been held high by yield differentials against the US dollar. We are also seeing a 2 year high in the yield differential in favour of the euro with the European Central Bank likely to raise interest rates long before the US Federal Reserve does.

Although the euro seems to be happily gaining against the dollar, this seems to be an odd situation as news was announced that ratings agency Moody’s had reduced Greece’s sovereign debt rating from Ba1 to B1, a drop of three degrees to a classification of “highly speculative”

Furthermore, comments from Axel Weber, the head of the Bundesbank, backing up ECB president Jean-Claude Trichet’s speculations last week that the central bank will ramp up interest rates, have fuelled criticism from those who say that this raise will hit those barely treading water on the Eurozone periphery.

According to Michael Hewson, an analyst at CMC Markets, the widely speculated interest rate hike is the potential straw that breaks the camel’s back. “There is still a real European debt crisis that the market seems to be carrying on regardless of. This is partly because the ECB doesn’t meet to discuss interest rates until the end of the month. In short, the conclusion of the discussions as to how to respond to the next round of the European debt crisis will be that if Germany doesn’t stump up the cash to shore up the ailing parts of the euro area, then the zone is in real difficulty.”

At first sight, it seems that the euro is a currency on a slow, steady ascendancy whereas the franc is seeing a slump after a short term rise. However, beneath the surface things couldn’t be more different. The Swiss franc is backed up by an economy of Alpine solidity. The euro, though boasting the steel structure of German industry, is resting on Belgian chocolate foundations, now exposed to the Mediterranean heat of Spanish and Portuguese economic woes.