The Swiss Franc is the Safest Haven

Can the catastrophic state of the stock markets worldwide be at least partially overcome by investing in the foreign exchange market? Experts claim that caution is still warranted in this regard, as the extent of the crisis that has escalated in recent weeks cannot yet be accurately predicted.

Written by: Amir Kulenović
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Despite the strengthening of certain currencies, particularly the US dollar, the state of the currency market in recent months is as uncertain as that of the stock market and other financial instruments. Zdeslav Šantić, director of the Economic Research Department at Raiffeisen Consulting, believes that pessimism is a prevalent characteristic in currency trading.

Eyes on the FED and ECB

– Problems in the financial sector, reflected in the losses and bankruptcies of financial institutions in the US, have halted the last recovery of the US dollar against the euro – says Šantić. After the strengthening of the US currency and trading at levels of approximately 1.39 dollars for the euro about ten days ago, trading has recently occurred at slightly higher levels. Analysts at Zagrebačka Banka expect a weakening of the dollar exchange rate due to last week’s disaster on Wall Street.  – The calamities related to the new collapse of American banks and insurance companies have been accompanied by greater volatility in the euro and dollar exchange rates, but without a distinct winner. This volatility mirrored a range from 1.41 to 1.45 US dollars. We do not expect the strong trend of the dollar strengthening against the euro (which caused the euro to briefly fall below 1.40 USD for the first time in a year last week) to continue in the coming weeks, estimating that the EUR/USD level of 1.40 will be a solid support point for the euro in the coming months – they believe at Zaba.

However, it should not be forgotten that the current crisis, most prominent in the US, will likely quickly transfer to the rest of the global financial market to a greater extent. Investors continue to treat the dollar as the most important and safest global currency, so we often see an increase in the value of the dollar in conditions of greater political and economic risks.
– In the longer term, the most significant influence on the movement of the EUR/USD exchange rate will come from developments in the economies of the US and the eurozone, and there are increasingly prominent signs of a significant slowdown in activity in the observed economies. Future moves by the FED and ECB will largely determine movements in global foreign exchange markets – thinks Šantić.

Furthermore, it is expected that the ECB, the European Central Bank, will be forced to stimulate economic activity in the eurozone with a more expansionary monetary policy despite its current reluctance to lower interest rates due to prominent inflationary pressures. Therefore, RBA expects that in 2009 the EUR/USD exchange rate will remain at levels of approximately 1.35 dollars for the euro. Regarding the British pound, analysts believe that the latest indicators from the UK largely confirm the market’s pessimistic expectations about the state of the local economy. One of the currencies that has shown remarkable resilience in previous crises is the Swiss franc. Although the Swiss bank UBS has reported significant losses related to the US real estate market, the Swiss currency has proven to be quite resilient.

The Yen is Attractive Too

– In the newly emerged situation, the Swiss franc has partially, but only briefly, benefited, thus confirming its title as a safe haven in global crisis times – they believe at Zaba. Although the economy in Switzerland is also slowing down, analysts do not expect significant changes in the value of the franc compared to the euro, at least not in the short term.
Emira Čustović, co-author of the book on the foreign exchange market Forex – Learning and Earning, believes that in the short term one should bet on the currency pair Japanese yen – pound. – Looking at the short-term period, the Japanese yen, or the GBP/JPY currency pair, is currently attractive, as it is very speculative and has a very large daily movement. A good long-term investment could be in changing the EUR/USD ratio – thinks Čustović. All analysts agree that the foreign exchange market, like the stock market, is short-term uncertain for achieving higher returns. It will take quite some time, at least until the end of the year, for the distrust in the entire financial sector to diminish somewhat.