Euro is the New Safe-haven Currency. Or is it?

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euro-96289_640Euro performs surprisingly well in the current financial storms, though, our according to our interviewee, market players who deem euro to be the new ‘safe-haven’, are wrong. John Higgins, foreign exchange strategist of the Capital Economics thinks people buying euro now are making a grave mistake, because they expect that Fed will postpone the interest-rate increase planned for this autumn.
Furthermore, neither the belief that the Greek matter has been resolved nor that China is in great trouble are true.
The analyst of the Capital Economics supports the opinion of his colleagues: it is only a market correction; there is no danger of collapse, and the strengthening of the euro against the dollar is only ephemeral. But in such troublesome times, the euro keeps the forint stable – he adds.

Péter Zentai: I would have bet that in the current turbulences if anything then the dollar will get stronger. After all, the dollar – in difficult times – is always triumphant. But now, the dollar is weakening against the euro, the yen, and the Swiss franc as well. Is the euro victorious?
John Higgins: We do not agree with headlines saying ‘the euro is the new safe-haven’ at all. Now the euro is getting stronger indeed, but we believe, the presumption behind it is a misbelief. Namely, that the influential market players think that Fed – due to the current situation of the world market – will not increase interest-rates this autumn – and probably not even later.
I am absolutely convinced – and so does Capital Economics – that Fed will absolutely not be concerned about the recent events of the global stock exchange. The fact that that exchange rates are diving in China will not hold off the decision makers of the American central bank from increasing interest-rates in September, and continuing to do so. Fed is concerned about the American economy only, which can separate itself and become essentially independent from the other parts of the world, and is ready for the increase of interest-rate.

Can the relative strength of the euro be explained by this misconception?
The other explanation is that the main players believe that the Greek crisis is over, and with the third rescue package, it will be resolved.
We think that this too is a false belief – the Greek drama is far from being over. We presume that the Greek problem has deeper roots than this, and can return at any time, increasing the possibility of an outcome where Greece has to leave the Euro Zone. Which is, of course, a double edged sword: the uncertainty it creates can weaken the common currency, while with Greece leaving, the euro would become a stronger.
Taking these factors into account, we believe that the euro will be under pressure again, due to the opposing monetary policies of the two central banks.

How will the Hungarian currency perform in the next period if the euro gets stronger?
The forint, just like the złoty, the lei, and the Czech crown, is pegged to the euro.
I would distinguish three categories of the currencies of declining emerging markets. The first is the currencies of those Asian countries, which are strongly dependent on the Chinese economy. The second is the currencies of great raw material exporting countries, while in the third category there are currencies such as the Turkish lira – here the financing of the economy would suffer deeply from a potential stricter American monetary policy. The forint does not belong to any of these categories.

What do you think is happening in the markets? Isn’t it suspicious of collapse?
No, it is not. This is simply a correction. Those factors that generated the fall in the exchange rate, are objectively not severe. It all had started in China, because in an extremely overheated market, ultra-speculative type ‘players’ began to lose. Chinese stock exchanges – among other big capital markets – reflect the objective situation of the economy the least.

But the Chinese economy has been slowing down…
I am not saying the opposite. However – I think – that economic growth level which China reached, has become sustainable. Growth does not stop, we do not see any risk of recession, so we believe, what happened in China was nothing but the burst of the stock exchange bubble. But the Chinese economy did not burst. It is still very much in the pink. As soon as things calm down in China, the rest of the capital markets will return to normal.

Won’t the Chinese developments have severe effects on America – being financed by China via enormous government bond purchases?
According to our most recent analyses, they will not have a severe effect, since – as I said before – there is no real drama in China, and we do not expect one anytime soon either. The American central bank will initiate the interest-rate increase cycle in the next month, and with the regular interest-rate increases, the dollar will get stronger again. The euro and the Eastern-European currencies pegged to it will become weaker against the dollar again, especially, since the Greek issue is far from being over…

Original date of Hungarian publication: 26 August, 2015