UBS: We Are In The Eye Of The Foreign Exchange Hurricane

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Demand for safe haven currencies surged in May when investors were panicked about the Greek elections and weak economic data coming from the US, UK, eurozone, China and India.Then stronger-than-expected Australian and UK economic data, increased hope of Spanish bank bailouts, China’s first interest rate cut since 2008, and expectations of QE3 gave foreign exchange markets some relief.

But UBS analyst Syed Mansoor Mohi-uddin says that the current calm in the forex markets will be short-lived. 

He gives us 3 reasons he still favours the U.S. dollar and the yen over other major currencies.

  1. Risk will rise sharply come June 17 when Greece holds its second election since it’s quite likely that the nation’s pro-bailout parties will be unable to form a government, “with the result that the EU and IMF would stop disbursing external aid after June.” This raises the risk of a Greek disorderly default on its €266 billion of government debt in the coming weeks. 
  2. Any notions of definitive action in favour of a banking or fiscal union at the June 28-29 EU summit are premature. Spain wants European aid to recapitalize its banks but EU countries will want some conditions on economic reforms in exchange.
  3. Major central banks are still shying away from a massive co-ordinated action to boost investor sentiment until the risks stemming from Europe’s crisis become clearer. So, the ECB and Bank of England kept their policy unchanged, while Fed chairman Ben Bernanke didn’t signal that QE3 was a sure thing when he appeared before Congress.

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