Currency market predicts stormy summer

Even after share prices took a step back at the beginning of this week, 2021 is shaping up to be a good year for stock markets. For example, the AEX is more than 17% higher than at the end of 2020. This puts investors ahead of the strong economic recovery that is emerging now that the corona measures are being scaled back in more and more countries. On the other hand, interest rates on the bond markets remain remarkably low. This is a signal that they do not count on the economic growth slump leading to rising inflation. Or that growth is even nipped in the bud. Currency markets are giving an increasingly clear signal in which direction the balance will soon tip.

The dollar has been steadily gaining ground against the euro since late May. The strength of the US currency was initially attributed to reports that the central bank may raise interest rates earlier than expected. However, the dollar also serves as a safe haven where investors park their money in uncertain times. It seems that this characteristic also plays a role in the recent price increase. The yen has the same property. The Japanese currency has also been in a strong period in recent weeks – and that has nothing to do with an expected interest rate hike. The Bank of Japan lowered its growth forecast for the current fiscal year at the end of last week. Although the bank still counts on the economic recovery to continue, an interest rate hike is likely to be a long time coming. Nevertheless, the yen has even appreciated against the dollar since the beginning of July.

Interest of -0,75%
The Swiss franc also belongs in this list. Despite the fact that the Ministry of Economic Affairs predicted in mid-June that the economy will recover faster than expected, an interest rate hike in that country is still a long way off. According to the Swiss central bank (SNB), inflation will rise from 0,4% in this year to 0,6% in 2022 and 2023. Only at a level of more than 2% will the SNB prepare for the extremely low policy rate of -0,75% increase. As with the yen and the dollar, the recent price appreciation is partly due to the fact that major financial parties are choosing to be on the safe side. For the time being, the low interest rates give little reason to hold money in francs. The strength of the currency – even against the dollar – is partly due to the fact that major financial parties choose to be safe.

Storm on the stock market?
It is also no coincidence that the dollar, yen and franc were all on the rise as concerns about the delta variant of the corona virus sparked turmoil in financial markets. By the way, nice quarterly figures seem to tempt the equity markets to entice investors to take some risk. In recent days, a large part of the price damage has already been recovered. However, the sharp fall in bond market yields and the strength of safe-haven currencies tells a different story. It could just be that we are heading for another stormy (late) summer.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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