Despite all policy intentions, markets have their own life. Central Banks, Governments and Authorities in the past years have made several attempts to prop up ailing economies.

The prevalent trend is to weaken one’s currency in order to attract more business in the form of exports. Unfortunately currency competition (wars) and other unintended market factors dilute most good intentions. Intervention into markets remains an ideal often out of the hands of even the best economic experts.  

EURUSD

The Euro continued to strengthen against the USD in the first quarter of 2016. From end November 2015 to date, the Euro strengthened by eight per cent against the USD, now at $1.13,61 to the Euro.

There are two main reasons for the strength we have seen in the euro.

The first is the corporate bond buying program announced at the last ECB meeting.  On March 10, Mario Draghi announced that the ECB will increase its bond buying program by €20 billion each month. That alone should result in a deterioration of the Euro against the Dollar.

However, he also added that the ECB will also be buying corporate debt (not of all corporates obviously, those that meet the criteria). This would lead to an increased demand for the Euro as foreigners would look at buying corporate debt as it increases in price, knowing that it is eligible bond and the price is expected to increase.

The second reason for the rise in the Euro against the Dollar is the fact that the Federal Reserve is taking a dovish tone and giving the signal that it is no longer going to hike rates aggressively.

When a central bank announces quantitative easing, one of the effects is a lower currency. This time round the ECB saw a strengthening of the Euro instead, something which probably was not the policy makers intention.

My opinion is that the weakness in the Dollar will be short lived. Data out of the US is coming out strong and it favours a rate hike.

So if you plan on going to the US this summer it might be wise to start buying some Dollars now, because I’m of the view that a June rate hike is on the table.

JPYUSD

Another currency which has been rallying like there is no tomorrow is the Japanese Yen.  From the end of January to date, the Yen strengthened 12 per cent against the dollar.

The strength of the Yen is resulting in a failure in Abenomics.  Abenomics refers to the economic policies advocated by Shinzo Abe. Which include massive monetary and fiscal stimulus and regulatory reforms with the intention of weakening the currency enough to make Japanese exports attractive once more. That should kick start economic recovery.

With the US delaying hiking rates and investors in risk off mode, investors are rushing into the Yen as a safe haven.

This short term spike in the Yen has put Japanese exporters on their knees as now the price of their exports are much more expensive. The currency was one of the main reasons for the 17% drop in the price of the Nikkei year-to-date.

On Friday we saw the Nikkei trade in positive territory after Japanese Finance Minister Taro Aso said the government would take steps as needed to arrest the yen's climb. 

EURGBP

I have seen various polls on whether or not the UK will leave the European Union and none of them give the same conclusion.

In general, UK citizens are saying that the UK is a strong economy and can survive in or out of the Union. However the currency is telling us that such optimism may be misplaced. 

The weakness in the Sterling sends the message that there is a significant probability the UK will leave the European Union. As the date approaches further Sterling depreciation will continue to provide an indication of an increasing probability of Brexit. From mid-November 2015 to date the sterling has weakened 15 per cent against the euro, now at 80p to the euro. This is something which shouldn’t be ignored especially when taking investment decisions these coming months.

On a positive note, you might want to take a break from the markets and consider taking a trip to the UK before June 23. A 15 per cent discount on your purchases and accommodation is not something you come by every day.

Conclusion

If there is something that’s certain is that the currencies are very difficult to predict. But if you look at the trend they tell a story and investors should not ignore it.

Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.