Confidence in European policymakers’ ability to address the debt problems in the region has seen a slowdown in demand for safe-haven currencies. That should come as a relief to the Swiss National Bank (SNB) and the Danish central bank, both of which have been fighting against appreciation in their currencies, as investors have looked for a refuge from the turmoil in the eurozone.
Evidence of a softening demand for CHF and DKK comes from developments in the money market.
Indeed, the pace of increase in sight deposits in Switzerland has slowed dramatically in recent weeks.
Ian Stannard, head of European FX strategy at Morgan Stanley, says sudden large spikes higher in sight deposits, while not an exact guide to safe-haven inflows into Switzerland, have been consistent with SNB intervention to maintain the SFr1.20 floor it imposed in EURCHF in September.
“Hence, the current slowdown in the pace of increase of sight deposits in conjunction with the stabilization in European asset markets tends to suggest that safe-haven inflows to the CHF could also be slowing, for the time being at least, implying that the acceleration in the accumulation of FX reserves by the SNB in recent months could ease,” he says.
Source: Haver, Morgan Stanley
Appreciation pressure on the DKK has also eased in recent weeks, with the forwards market moving to price in a weaker krone.
“We would also take this as a signal that safe-haven flows from the EUR have slowed down,” says Stannard. “The DKK was also being used as a safe haven from Europe developments, along with the CHF, as well as the GBP and SEK.”
Source: Haver, Morgan Stanley
Stannard says the EUR is now showing signs of a recovery, not only against the USD but on many of the crosses as well. However, he adds that the move higher is still lagging behind the many market indicators Morgan Stanley models in other asset markets that suggest increased optimism over eurozone officials’ ability to handle the region’s debt crisis.
He says there appears to have been an initial reluctance for investors to move away from bearish EUR positions as currency markets take a far more cautious approach to recent events, unconvinced that the current anticipated policy initiativs are, in fact, game changers.
“However, there is now increasing evidence that even currency markets are finding it difficult to ignore the positive signals, as our positioning indicators reveal that EUR short positions are starting to be reduced,” says Stannard.