Record Plc, a London-based currency manager that oversees $31.4 billion, said the Czech koruna is poised to be one of the next havens if Europe’s debt crisis worsens, given the Swiss franc has stabilized after surging.
“We’ve exhausted the move in the franc now and we’re looking for other alternatives,” Bob Noyen, Record’s chief investment officer, said in an interview. “The market will constantly probe for the next outlet. The Czech koruna and other harder eastern European currencies also have the potential to benefit.”
Record, which set up a fund in June that aims to exploit market moves when stress in Europe’s debt crisis intensifies, also recommends using interest-rate derivatives to profit from speculation that the European Central Bank will be forced to resort to so-called quantitative easing. The ECB has succeeded in pushing down Italian and Spanish bond yields this month, while the franc has receded from near-parity with the euro.
“When things are calm, we buy cheap insurance for when the fear returns,” said James Wood-Collins, Record’s chief executive officer. “The stresses could remain unresolved for a period of one to two years.”
The koruna has strengthened 2.4 percent against the euro this year as Czech policy makers debate whether to raise interest rates. Moody’s Investors Service affirmed its A1 rating, the fifth-highest, on the Czech Republic on Aug. 4 and said strong finances will shield it from the crisis.
Options Pay Out
Europe’s debt crisis and the global economic slowdown may drive investors to Czech government bonds as low interest rates and a stable currency make the country “the safe haven” of emerging Europe, UniCredit SpA said on Aug. 2.
The Swiss franc soared more than 23 percent from its April low this year against the euro to a record 1.00749 per euro on Aug. 9 as debt-crisis contagion spread to Italy and Spain. It also set a dollar record as Standard & Poor’s downgraded the U.S. The gains prompted the Swiss National Bank to fight back with measures to weaken the currency.
“We bought options some time ago that were very far out of the money for the Swiss franc, and now they would pay out,” Noyen said in the interview on Aug. 10. The franc traded at 1.03002 against the euro that day, and has subsequently retreated about 13 percent.
Among other foreign-exchange havens, “commodity currencies are the obvious ones,” as well as the Swedish krona and Norwegian krone, Noyen said.
The ECB started buying Italian and Spanish securities last week, according to people with knowledge of the trades. It had previously bought bonds from Greece, Portugal and Ireland. So far it has offset all of its purchases of government debt by absorbing the equivalent amount from banks via term deposits, a process known as sterilization. Quantitative easing occurs when bond purchases aren’t sterilized.
“Interest rates are next,” Noyen said. “People will probably start to bet that the European Central Bank will monetize countries’ debt. That risks triggering a bout of inflation that would push up longer-term interest rates of the high-grade borrowers, such as Germany.”
-- With assistance from Krystof Chamonikolas in Prague. Editors: Keith Campbell, Mark McCord.