Saturday, 7 May 2011

GBP/CHF clear loser over last 4 years

Measuring the relative strength of various currency pairs can be done using a separate benchmark such as determining the price of gold for each currency, and then creating an index to see how much more or less the gold price in that currency is now rather than it was priced at the base period for the index.

The method chosen to prepare the chart above is simply to contrast the current relative performance of six major currency pairs - each with the Swiss Franc as the base currency. The starting period chosen is the end of July 2007 which marked an important inflection point for most FX pairs.

The results clearly show that GBP/CHF is the weakest pair, and as of the Friday May 6th closing price, sterling is 38% less valuable against the Swiss Franc than it was at the end of July 2007.

The other results are as follows, in descending order:

  • JPYCHF is up by 2%
  • AUDCHF is more or less at par
  • CADCHF is down 18%
  • EURCHF is down 20%
  • USDCHF is down 30%

The strength of the yen underlines the peculiar position that the Japanese yen occupies in the FX market - both as a key component of the FX carry trade, and, less now than a few months ago, indicative of the yen's traditional relative safe haven status even vis a vis the Swiss franc

Of the key commodity currencies the Australian dollar has more or less retained its position at par value, while the Canadian dollar has performed more or less in line with the euro, as both have declined by similar amounts of approximately 20%.

The US dollar has declined by 30 % but the wooden spoon clearly goes to sterling.

Unsurprisingly, the notable under-performance of GBP/CHF, and the associated lack of purchasing power of sterling, is manifesting itself in higher domestic inflation in the UK

What is perhaps more remarkable is that yields on 10 year gilts are still relatively similar to those on 10 year bunds and 10 year UST's, indicating that global asset allocators are not demanding much of a risk premium for holding obligations in, by far, the weakest of the major currencies.

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