FISCAL POLICY LIFTS LOONIE AND SWISSIE
As the first quarter of 2010 draws to a close, some currencies are enjoying a safety premium due to their superior fiscal and trade balance position. In Europe, the Swiss economy is currently running both a fiscal and trade balance surplus and it stands in sharp contrast to the much larger Eurozone economy.
The single currency bloc is plagued by fiscal deficit problems among its southern member states and a deteriorating current account balance. Little wonder then, that euro-Swiss franc is trading near all-time lows in the SFr1.4300s, well below the SFr1.5000 level that only a few months ago was considered to be an ironclad support level.
In North America, the Canadian economy’s balance sheet position is far superior to that of its neighbour to the south. Not only has Canadian trade returned to surplus in 2010 after recording its first deficit in decades in 2009, but the Canadian budget gap is minor relative to that of the US. In 2010 the Canadian fiscal deficit is projected to decrease to Ca$49.2bn, staying below 4 per cent of GDP. Contrast that with the US budget deficit, which is expected to exceed $1 trillion – or approximately 10 per cent of GDP.
Ironically enough, both the Swissie and the Loonie (Canadian dollar) carry very low yields of only 25 basis points. Both the Swiss National Bank (SNB) and the Bank of Canada (BOC) have tried everything in their power to dilute the value of their respective currencies as authorities in both countries are increasingly concerned about the competitive positions of their export sectors.
The SNB has intervened in the market on numerous occasions as it tried to maintain euro-Swissie above SFr1.5000, but has since given up on its targets and is now simply content at managing the decline in the pair in an orderly fashion.
Meanwhile, the Canadian officials are loathe to see the Loonie reach parity with the dollar, but they may have to become resigned to such a possibility. Last week’s Canadian inflation numbers soared to 0.7 per cent from 0.1 per cent the month prior, putting strong pressure on the BOC to begin raising rates in the near future. If the BOC starts to tighten by the summertime, then US dollar-Canadian dollar seeing parity becomes a foregone conclusion.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail [email protected].