Currency markets driven by safe-haven themes, MS warns
While bond, credit and equity markets have made bullish moves, currency markets remain driven by safe-haven themes, according to research published by Morgan Stanley.
In a note, the US bank said that as the markets correct, either bond, credit and equity markets turn sour from here or safe-haven currencies lose ground.
“Bullish US data releases have pushed the US dollar higher, namely against euro. A strengthening US economy increases dollar safe-haven qualities beyond repatriation flows from overseas investments. Hence, the market’s bullish US dollar reaction to positive US data makes sense to us, as long as investors remain euro-sceptical,” the bank said.
Moreover, data published by the Swiss National Bank showed that Swiss currency reserves are no longer growing, suggesting that the capital flight out of the eurozone has come to a halt.
“The successful stabilisation of peripheral bond markets via European Central Bank President Draghi’s verbal intervention has stopped deposit shifts into Switzerland, in our view,”economists said.
Should what Morgan Stanley calls the “Draghi Put” prove successful in the near term, analysts advice to buy euro and EMFX, funded with safe-haven currencies.
The divergence between high FX market correlation and historically low volatility is also unusual, suggesting either volatility increases or correlation subsides.
“High liquidity and relatively inexpensive implied volatility can make FX options an attractive proxy for hedging cross-market risk. We have developed a filtering process to determine which currencies offer the most cost-effective proxies for event risk in other markets,” the bank said.