Asian traders rethink risks as Swiss open new front in currency war

ASIA’S traders are reappraising the outlook for risk after the Swiss decision to scrap the cap on the franc.

A Swiss banknote is seen beneath a euro banknote on Januay 15, 2015 in Lausanne. In a shock announcement on January 15, Switzerland's central bank said it was ending a three-year bid to artificially hold down the value of the Swiss franc against the euro, in a move that immediately sent the safe haven currency soaring. AFP PHOTO / FABRICE COFFRINI

THE strength of one particular currency was meant to be one of the major risks for Asia’s markets in 2015 — the US dollar. But by the time the traders who man Asia’s dealing desks came to work on Friday morning, they had another issue to add to the growing list of worries after the Swiss National Bank opened a new front in the global currency war.

The start of a new year has been a difficult affair for Asia as uncertainty notches up a level with the ongoing capitulation in oil prices, a sudden collapse in copper prices, nagging doubts about China’s growth, and the Reserve Bank of India leaving traders wrong-footed with a surprise interest cut earlier in the week. Add to that the dramatic spike in the Swiss franc against the euro on Thursday, and it’s easy to understand why Asia’s traders and investors are already reappraising the outlook for risk and returns.

While Asia is far from the epicentre of the tremor unleashed by the SNB’s decision to abandon the ceiling on the franc’s value against the euro, the region wasn’t immune from some modest aftershocks.

The Singapore dollar, considered by some as the “Swiss franc of Asia”, enjoyed a solid rise on as its reputation as a stable currency attracted capital. The region’s gold mining stocks were in hot demand on Friday amid a renewed appreciation of its status as a safe haven asset. Newcrest Mining, the largest listed gold miner in the region, soared nearly 7 per cent, while market darling Northern Star Resources added another to 7 per cent to bring its gain since early November to 110 per cent.

Admittedly, swings in the Swiss franc against the euro are not a huge issue for Asia. Sure there are some corporate borrowers who may have to pay more in the wake of the rise in the Swiss franc’s value. Asian borrowers issued 4.2 billion Swiss francs worth of bonds last year, with Australian corporate issuers leading the way followed by companies from South Korea and China. However, the interest for Asia investors is what the move by Switzerland’s central bank signals about possible policy changes that may have a significant impact on the region.

The policy shift by the Swiss National Bank acknowledges the reality that holding the franc steady against the euro in the wake of the possible start of quantitative easing by the European Central Bank would be difficult, if not impossible.

Add to the mix the belief that the US dollar will move higher on the back of an improving economy and higher interest rates, which will also affect the value of the euro, and it’s understandable why the Swiss National Bank ­decided that discretion is the better part of valour when it comes to the use of its taxpayer-funded ­balance sheet.

So what does this mean for ­investors in Asia? Well, there are some analysts who believe the Swiss National Bank’s move telegraphs that the European Central Bank will pull the trigger in quantitative easing in order to revive the region’s moribund economies.

If the ECB starts rolling the printing presses, some analysts ­believe it could be good for emerging market currencies.

The theory is that low European interest rates could provide a funding source for investors to ­invest in emerging market currencies. UBS, for example, suggests being short the euro against the Indian rupee.

Christy Tan, who heads markets strategy at National Australia Bank, said the move by the SNB would prompt investors to take some risk off the table and reassess positions ahead of a big week of data releases from China.

She added that being long the US ­dollar against Asian currencies had become a crowded trade. While Tan is still bullish in the US dollar over the longer term, the ­increased currency volatility has made her more cautious. Eddie Cheung, a foreign exchange strategist at Standard Chartered, reckons the SNB’s surprise move, coupled with the RBI’s rate cut, means global interest rates should stay lower for longer than was ­expected just a couple of days ago.

He says this should support the US dollar. Cheung expects Asia’s central banks to maintain a bias towards accommodative monetary policy in the first half of 2015, followed by a divergence in policy in the second half of the year.

However, that’s probably driven more by cheaper oil helping Asia’s trade balances rather than policy actions in Europe.

The bottom line from the Swiss surprise is investors need to think about volatility and risk management just as much as security ­selection and asset allocation. And remember, always expect the unexpected.

Dow Jones Newswires