Lining Up the Second Tier. By Nicholas Hastings
As faith in the top tier fails, it is second tier currencies that will be winners.
At the moment, the Norwegian, Swedish, Canadian and Australian currencies are lining up to rally.
This week has not only brought confirmation that European Union efforts to save the euro from a further nasty ride have essentially failed, but that the political uncertainty in the U.K. that has hurt the pound is only likely to continue.
Conservative leader David Cameron may have finally been appointed prime minister after last Thursday's general election, but the success of his coalition with the Liberal Democrats and the ability of the new administration to start cutting the U.K. deficit are still very much in doubt.
See the small bounce the pound got as Cameron entered Number 10 Downing Street:
Click Image to Enlarge
For the moment, the traditional safe havens for investors--the dollar and the yen--have stepped up to the plate, especially given the latest decline in global risk sentiment.
However, the international investment community could soon start to look elsewhere, both because prospects for the dollar and the yen look uncertain and because global risk appetite should improve.
"While risk looks fragile today, the market will eventually start to look at fundamentals again and with global economic data continuing to recover, risk can pick up again," said Melinda Burgess, a currency strategist with the Royal Bank of Scotland PLC in London.
There is also the simple loss of confidence in the U.S. recovery and the feeling that those people expecting increases in interest rates may have got ahead of themselves.
A recent survey by the National Federation of Independent Business suggests that while larger companies are doing well, because they can access credit more easily, smaller companies are underperforming and that the economy still runs the risk of falling back into recession.
With core inflation running at low levels and fiscal tightening just around the corner, "the need for monetary tightening does not appear to be there," said James Knightley, chief U.S. economist with ING Financial Markets in London.
The outlook for Japan is, of course, much worse with further monetary easing still a possibility ahead of Upper House elections in a few weeks' time. On top of this, there is the country's deteriorating fiscal position, a factor that will come into increasing investor focus as fiscal discipline becomes more of a market concern.
Last weekend's EUR750 billion emergency funding package for the euro zone has already helped to intensify these concerns, with the euro now suffering from the assumption that there is little the EU can do to force debtor nations to reduce their budget deficits.
Steven Barrow, senior economist with Standard Bank in London, described this as a "scary thought."
"If there was not a euro crisis before the weekend bailout, there is now," he said.
This is why a more favorable light is now falling on the second-tier candidates mentioned above.
In addition to their triple-A rating, based on strong fiscal positions, most have economics that are gradually pulling ahead of their neighbours and are more likely to offer investors higher returns as pressure for more interest rate hikes grows.
Earlier Wednesday, Australian Treasurer Wayne Swan said his government's budget will return to surplus three years sooner than expected, at A$1 billion in 2012-13.
Sure, dips in inflation pressures could reduce rate-increase expectations from one month to the next in some of these countries. But, in all cases, chances are that rates will start climbing well before those in the U.S., Japan, the euro zone or even the U.K.
The Australian dollar was up at $0.8962 at 0645 GMT from USD0.8925 late on Tuesday in New York, according to EBS.
The currency rose despite another knock to global market confidence as fears about a Greek debt default refused to go away and U.S. investigators started to probe Morgan Stanley.
The shift into safe havens helped the dollar to fall to Y92.71 from Y92.81 while the euro fell to $1.2637 from $1.2700. The euro was also down at Y117.18 from Y117.88.
The pound, meanwhile, was still down, trading at $1.4910 form $1.4961 late in New York.
At the moment, the Norwegian, Swedish, Canadian and Australian currencies are lining up to rally.
This week has not only brought confirmation that European Union efforts to save the euro from a further nasty ride have essentially failed, but that the political uncertainty in the U.K. that has hurt the pound is only likely to continue.
Conservative leader David Cameron may have finally been appointed prime minister after last Thursday's general election, but the success of his coalition with the Liberal Democrats and the ability of the new administration to start cutting the U.K. deficit are still very much in doubt.
See the small bounce the pound got as Cameron entered Number 10 Downing Street:
Click Image to Enlarge
For the moment, the traditional safe havens for investors--the dollar and the yen--have stepped up to the plate, especially given the latest decline in global risk sentiment.
However, the international investment community could soon start to look elsewhere, both because prospects for the dollar and the yen look uncertain and because global risk appetite should improve.
"While risk looks fragile today, the market will eventually start to look at fundamentals again and with global economic data continuing to recover, risk can pick up again," said Melinda Burgess, a currency strategist with the Royal Bank of Scotland PLC in London.
There is also the simple loss of confidence in the U.S. recovery and the feeling that those people expecting increases in interest rates may have got ahead of themselves.
A recent survey by the National Federation of Independent Business suggests that while larger companies are doing well, because they can access credit more easily, smaller companies are underperforming and that the economy still runs the risk of falling back into recession.
With core inflation running at low levels and fiscal tightening just around the corner, "the need for monetary tightening does not appear to be there," said James Knightley, chief U.S. economist with ING Financial Markets in London.
The outlook for Japan is, of course, much worse with further monetary easing still a possibility ahead of Upper House elections in a few weeks' time. On top of this, there is the country's deteriorating fiscal position, a factor that will come into increasing investor focus as fiscal discipline becomes more of a market concern.
Last weekend's EUR750 billion emergency funding package for the euro zone has already helped to intensify these concerns, with the euro now suffering from the assumption that there is little the EU can do to force debtor nations to reduce their budget deficits.
Steven Barrow, senior economist with Standard Bank in London, described this as a "scary thought."
"If there was not a euro crisis before the weekend bailout, there is now," he said.
This is why a more favorable light is now falling on the second-tier candidates mentioned above.
In addition to their triple-A rating, based on strong fiscal positions, most have economics that are gradually pulling ahead of their neighbours and are more likely to offer investors higher returns as pressure for more interest rate hikes grows.
Earlier Wednesday, Australian Treasurer Wayne Swan said his government's budget will return to surplus three years sooner than expected, at A$1 billion in 2012-13.
Sure, dips in inflation pressures could reduce rate-increase expectations from one month to the next in some of these countries. But, in all cases, chances are that rates will start climbing well before those in the U.S., Japan, the euro zone or even the U.K.
The Australian dollar was up at $0.8962 at 0645 GMT from USD0.8925 late on Tuesday in New York, according to EBS.
The currency rose despite another knock to global market confidence as fears about a Greek debt default refused to go away and U.S. investigators started to probe Morgan Stanley.
The shift into safe havens helped the dollar to fall to Y92.71 from Y92.81 while the euro fell to $1.2637 from $1.2700. The euro was also down at Y117.18 from Y117.88.
The pound, meanwhile, was still down, trading at $1.4910 form $1.4961 late in New York.
- 12 May |
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