Speculators seek out sanctuary from shock

SHOCKS, both in the political and seismic sense, have driven flight into the US dollar and the Swiss franc as investors shy from risk.

Headlines in recent weeks have been dominated by political unrest in north Africa and the Middle East, but Libya’s turmoil is the first time that a major oil producing country has been affected by the upheavals. Libya is the world’s eighth largest oil exporter. According to Nick Beecroft of Saxo Bank, with anti-monarchy protests planned for Thursday in Saudi Arabia, the world’s largest oil exporter, there could be volatile times ahead for oil prices “The fall of Gaddafi, or even complete interruption of Libyan oil supplies, are not in themselves events to derail the developed world’s recovery, but they do represent another important step along the road that could lead to the destabilisation of Iran, Iraq and Saudi, and their oil supplies. That is something that really could cause real damage. Oil at $150 a barrel would be a severe setback for the developed economies.”

With risk-aversion dominant, the unrest in the Maghreb and the Middle East has seen flows into the dollar and swiss franc, seen as “safe” currencies by investors – the franc’s one-month implied volatility jumping to a two week high of 11.20 per cent

While the effect on the dollar was dulled by the US markets having been closed for President’s Day on Monday, Richard Wiltshire of ETX Capital reported Swiss private banks and funds are aggressively buying Swiss francs.

In the butterfly effect that is the foreign exchange market, the flows into the dollar drove the New Zealand dollar down, already driven low by the prospect of an announcement of a rise in interest rates that had been anticipated later in the week. This was before the news of the devastating earthquake in Christchurch sent the NZ dollar down to $0.7455.

Following the seismic events earlier this week, New Zealand’s central bank may hold off on the rise in interest rates. On the other side of the Tasman Sea, risk-aversion had the Australian dollar bobbing around parity with the US dollar for most of yesterday. (see chart)

Though the area will glean hope from the fact that earthquakes do not usually have lasting effects on the economies of developed countries, the Kiwi dollar will likely continue to be kicked around the currency markets for the short term. At the same time, political tremors from the shifts in power in the Middle East will continue to have currency speculators running for safer ground.