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Much speaks in favour of dollar, pound and the Norwegian krone – swisspartners – The art of finance

Much speaks in favour of dollar, pound and the Norwegian krone

Brazil’s political landscape before big break. Norway has what Europe desires: inflation. When will the British pound be worth buying again?

Battle against corruption in Brazil

The impeachment of the Brazilian President Dilma Rousseff is a testimony to the political will to fight rigorously corruption in Brazil. Both, the acting president and her predecessor, Lula da Silva, are being accused of corruption on numerous accounts. Lula da Silva would fare better taking care of his defence and abandoning his dream of running again for the presidency, especially in the face of the federal prosecutor requesting a two-year imprisonment for the former president. The Brazilian currency, Real, has responded positively to the first message of initiating the impeachment, while in the second wave have come massive sales by the international investors  not willing to be invested in Brazil anymore, thus, causing tremendous volatility of the Brazilian currency .

Inflation in Norway

The absence of inflation poses a substantial problem not only for the monetary authority (in particular the European Central Bank, ECB), but also stirs up currency markets. While in Europe, with minus 0.1 percent interests even a slightly negative inflation has been registered, Norway, with its 3.3 percent inflation rate, appears much more comfortable. This difference in inflation rates has an impact on the exchange rate of the Norwegian krone moving it upwards against the euro. The slightly negative inflation rates have the implication, that the ECB will continue expanding its purchase program of government and corporate bonds even more, flooding the markets with additional billions. On the other hand, the Norwegian central bank will pretty soon have to embark on an anti-inflationary course, leading to higher interest rates and, hence, supporting further recovery of the Norwegian krone.

In the periphery hint at positive bond yields

Continued absence of inflation (partly due to low oil prices) will force Mario Draghi, the head of the ECB, to further measures. Even though he himself has to realize that the ongoing money printing has brought no effects until now, he will persist on the assumed path. To the possible repertoire belong: extension of the bond purchase programme, interest-free loans to the banks and lowering the interest rate (even if already in the negative territory), whereby each of these measures will act in support of the bond market.

Following the buying spree of high-quality bonds (AA-rated or better), their yields slid in the meantime in minus across the board. It would, therefore, be not surprising if also the lower quality grades (BBB-rated or even non-investment grade bonds) benefitted from purchases. The situation compares well to the housing market: location, location, location; however, eventually prices for the prime locations will be driven high enough to make also the periphery attractive.

The pound calls for courage

The up- and down-swings of the British pound continue and will stay on that course up to the Brexit referendum to be held on 23 June, 2016. Since following the Panama Papers revelations, David Cameron – the main advocate of the UK remaining in the EU – came under political attack, the probability of an UK exit has increased again. The damage could be then done to both, the euro and the British currency. Nevertheless, most bank strategists continue acting on an assumption of a “no” to Brexit, that is, the UK remaining in the European Union.  Should this prediction prove correct, the Swiss franc holders would have to engage in buying the British pound right now. But who has the courage? A less risky appears betting on the pound appreciation buying with euro. If Brexit materialises, both currencies would fall, whereby the euro likely to fall even more. On the other hand, should Brexit be rejected, the recovery potential of the pound against the euro is likely to be substantial (see chart). The very interest rate difference speaks for a stronger pound against the euro.

Buy US dollars

Comparing the two major economies, Europe and the United States, one inevitably comes to the conclusion that the US dollar should continue to appreciate against the euro. Both, in respect to the growth rates – the US economy brightens up, while the economic data from the euro zone remain less convincing, as well as in respect to the interest rates, two distinct landscapes can be painted. Considering the most elementary factors contributing to a successful exchange rate forecast (interest rates, inflation, growth), one should shift from euro to US dollars.

swisspartners_graph 1_english

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