Does Risk Tone Affect The EUR & GBP?

The EUR & GBP are generally not considered as safe-havens or high-betas. But that does not mean they are immune to changing risk tones.
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EUR & GBP Risk tone

Just a quick question here from Scott asking us why we didn’t include the Euro, or the pound when we refer to our risk on and our risk of currency. So first of all, Scott the euro and the pound isn’t really considered as a safe haven or a high beta currency.

So when we look at risk on and risk off flows, we’re always gonna refer to either high beta, as a safe haven, so the high beta commodity link currencies would be your eyes or your cat and your Kiwi expected to go up in risk on and down and risk off. And then you have your classic safe havens, which is your Japanese yen and your Swiss franc expecting to go up in risk off and down and risk on.

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And then depending on the overall health of the global economy, we also have the US dollar which sometimes acts as a safe haven. So the current term or the market is currently facing is a good example of when the US dollar would be considered as a safe haven. So it is currently trading as a safe haven. Looking at the euro and the pound, there is really no risk connotations to either one of these two currencies.

It normally doesn’t trade as a high beta or a safe haven. Having said that, sometimes they can be affected by the overall risk zone. So for example, when we had all of the Brexit news, the hype about Brexit and the fears about Brexit, we did often see the pound trade in line with risk sentiment. When we have positive Brexit news, we saw it go up. And we also have negative due to Brexit. It’s all negative flows, which did impact the pound to some extent, but not really a safe haven or a high beta currency.

Looking at the Euro. The Euro was an interesting one last year. If we just quickly go to the terminal and open up our interest rate probability tracker, you can see that currently the European at the ECB is setting, the current rate is sitting at negative five and negative zero spot 5 percent.

Now because of that very low interest rate last year, a lot of investors did prefer to use something like the Euro as a funding currency for carry trades compared to your classic JPY and Swiss franc. So it was used as a as a as a funding currency, which is why we did see that big jump to the upside in the euro.

And we could just quickly go to the the daily chart that massive jump to the upside we saw in the Euro was due to a lot of unwinding of carry trades, using the euros of funding currency against your emerging market guarantees like your Mexican peso, your Russian ruble, South African czar.

So when we saw those positions, those scary carry positions being unwind that saw a lot of inflows coming back into the Euro, as it was used as a funding guarantee.

So in that regard, it tends sometimes act more as a as a safe haven so to speak, and alongside something I could show Japanese yen and your Swiss franc but it’s not something that you would trade generally speaking as a safe haven or a high beta currency, so I hope that makes sense there. Scott, if you’ve got any other questions, please make sure to let me know.

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