Currency world under the spell of stock market correction

The mounting tension in the financial world, resulting in price falls on the international stock exchanges, is affecting currency trading. Of these, the dollar and the Swiss franc are the winners for the time being.

Things are suddenly rumbling in the financial markets. The fall in share prices is particularly noteworthy. The Dutch AEX Index has fallen by approximately 5% in 7 trading days and the price loss is the same on most foreign stock markets. Worldwide, listed companies have lost more than €3.000 billion in value. The increasing tension in the stock market is of course also having a significant effect on the currency world.

The winners: dollar and franc
When uncertainty increases, many parties choose to look for safe havens. In the investment world, these include gold and government bonds from highly creditworthy countries, such as the Netherlands and Germany. In the currency world, the Swiss franc is one of the best known safe havens. The country has a stable political environment, a strong banking sector and a fairly conservative central bank. The franc has appreciated more than 2% against the euro in recent weeks.

In addition, the dollar stands out. In the past year, the value of the currency was still under pressure due to the rapidly accelerating economic growth in Europe and the budget plans of President Donald Trump. However, the dollar remains the most important currency in the world. Thanks to its safe nature, the decline of the past 14 months was reversed last week into a gain of 1,5% against the euro.

The losers: pound and bitcoin
The UK economy is quite fragile. Although recent economic data has been better than expected, consumer confidence is fragile. After the Brexit referendum, inflation has risen in Britain and there is a lot of uncertainty among the population about what to expect from Brexit. In addition, Theresa May's cabinet is rolling from one internal riot to another.

Finally, the chance of an interest rate hike is diminishing due to the turbulence in the financial markets. The pound has fallen 2% against the euro in the past 2,5 weeks. That is nothing compared to the free fall of bitcoin. The value of crypto coins is entirely determined by the sentiment among traders (without the influence of underlying trade flows). That sentiment has changed very quickly. When the price skyrocketed to $20.000 in mid-December, no one wanted to miss the boat. Meanwhile, the value of a bitcoin has fallen to about $7.000 and people want to stop their losses as soon as possible.

What's next?
It is impossible to predict stock prices, so it is impossible to say whether the stock market will recover tomorrow or in a few weeks. However, there are 2 things to keep in mind. The first is that central banks learned their lesson well nearly 10 years ago. As soon as investors really start to panic, they will do everything they can to stabilize the situation in the stock markets.

The second factor is that it always takes some time before calm returns to the financial world. Anyone dealing with foreign currencies should therefore take into account that the price movements are somewhat larger for the time being than what they were used to last year. It therefore does not hurt to map out the currency flows properly and to hedge the risks where necessary.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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