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Mar 04, 2010

Monthly Investment Newsletter March 2010: Investors run away from euro and sterling

Political risk premium structurally increased in developed world

Persistent improvement in underlying fundamentals for equities

 

Investors run away from euro and sterling

 

Since November 30, 2009 the euro and pound sterling lost some 10% and 9% respectively against the US dollar.

EUR/USD weakness is primarily caused by worries about the euro zone, as the region is manoeuvring in finding ways to prevent a default of Greece.

Greece and some other euro zone members (e.g. Portugal, Spain) will have to pursue very tight fiscal policies which will weigh negatively on euro zone growth.

Also, it could limit the ECB in lifting its official interest rate if and when such a move would be appropriate with respect to economic trends in the region’s core countries.

The Federal Reserve could take the lead of the G4 (US, UK, euro zone and Japan) in raising its official interest rate. Historically, the Fed did not hike before the US labour market showed a clear improvement.

Experience learns that (expectations of) diverging trends in short term interest rates are often important currency drivers.

Regarding Greece, we expect that the euro zone will do whatever it takes to prevent a default of Greece (or any other member state).

While the US and euro zone are taking (small) steps towards a normalisation of their monetary policies, the Bank of England is still very dovish though the fiscal situation in the UK is even worse than in the US.

The UK general election, on 3 June at the latest, could result in a minority government under Gordon Brown’s leadership (‘hung parliament’). This could influence sentiment around sterling negatively, as it increases political uncertainties.

At the moment, investors have shortened the euro massively. This could induce a short term rebound. Longer-term, the US dollar could strengthen further against the euro. We are negative sterling, versus the dollar as well as versus the euro.

 

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Monthly Investment Newsletter March 2010: Investors run away from euro and sterling

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