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Foreign Exchange

Currency index data likely to alarm SNB; commodity-linked currency indexes outperform in February

Perceived safe-haven currency index returns put in starkly diverging performances in February, according to data from an independent index provider, news that should alarm the Swiss National Bank (SNB) as it fights to contain the strength of its currency.

The passive, fully funded currency indexes provided to EuromoneyFXNews shows the yen and dollar suffered amid increasing optimism over global growth and as news of a second bail-out for Greece boosted investor sentiment. The Yen currency index was by far the weakest performer, dropping 5.85% in February, as the Bank of Japan surprised the market with an additional round of quantitative easing, potentially fuelling the return of a yen-funded carry trade should the rally seen on assets markets continue.

The Dollar index also fell 0.62% last month, suggesting investors were happy to fund positions by selling the US currency.

The Swiss franc, which has tended to move in tandem with the yen and dollar, took a notably different path.

The Swiss franc currency index climbed 2.04%, essentially tracking the performance of the euro, and showing little of its formerly held negative correlation with risk.

This should be worrying news for the SNB, which has undertaken a costly campaign to weaken the franc and would have been hoping that an improvement in risk appetite would weigh on the currency as investors used it to fund investments in other, higher-yielding assets.

Indeed, the use of the franc as a funding currency in carry trades sent the Swiss currency to a series of multi-year lows against the euro ahead of the financial crisis.

However, it would now seem that while rising risk appetite can prompt investors to use the yen and dollar as funding currencies, they are reluctant to abandon the franc amid fears of an escalation in the eurozone debt crisis.

The Swiss franc currency index, therefore, moved in lock-step with the Euro currency index, which rose 2.18% last month as news of a Greek rescue package and the ECB’s continued campaign to shore up the eurozone banking system saw investors reduce record short positions in the single currency.

Meanwhile, the Commodities currency index was the star performer last month, rising 3.29% as hopes for global growth heightened.

Commodity-linked currencies also topped the single currency rankings, with the Norwegian krone index was the best-performing single currency index. It rose 5.44% thanks not only to the currency’s strong oil links, but also signs from the Norges Bank, Norway’s central bank, that it would not intervene to stem strength in the krone.

The South African rand index also had a strong month, posting gains of 5.3%.

Improving confidence also lifted the Bric index, the best performer in January, which continued its strong start to the year with a rise of 2.8%.

Other emerging-market indices also built on their strong gains in January. The Central Eastern European and Middle Eastern currency index rose 2.7% in February, while the Latin American currency index climbed 1.97% and the Emerging Market Top 10 index was up 2.4%.



 Commodity-linked currencies outperform

 
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