Risk On, Risk Off!

It has been a tough couple of weeks for FX strategists out there. Just when it looked like the risk trade was back on- it was back off again!

It’s all about macro events at the moment – especially the potential for European sovereign default and contagion through the euro zone. The Euro rightly is under enormous pressure having dropped to a four month low against the US Dollar during the past week.

So if you’re short the Euro at the moment the trade is hopefully working out pretty well for you and may continue too. However, just how you’ve gone about shorting it interests me. A few weeks back I spoke about my concerns that the USD might not provide the safe haven status it has in the past and on a longer term outlook I’m still of that view.

Although the Americans are certainly leaving it to the last minute (again!) I’d expect Congress to raise the ceiling and avoid default by August. So onwards the can shall bump along down the road for a bit longer at least. At some stage though the markets will decide (and yes it will most likely be abruptly!) that the USA is a severe liability and likewise the USD and when that happens watch out. A short Euro/ long USD trade may work this time around but just stay alert is all I’m saying.

Things calmed down a little on Friday however if markets continue downwards next week then consider incorporating the following potential safe haven currencies into your FX strategy.

For safe haven currencies look to the Swiss Franc. The Franc made new record highs against the Euro and the USD during the week and could see renewed buying if markets deteriorate. Also commodity based currencies like the Aussie Dollar (AUD) and the Canadian Dollar could offer some shelter given strong commodity prices and their links to the Asian and specifically Chinese economies. We’ll take a closer look at the AUD next week.