G10 FX: Risk profiles and opportunities.

G10 FX: Risk profiles and opportunities.


hi I’m Eric Theoret currency strategist at
Scotiabank. I cover the g10 currencies; a category that encompasses the world’s
major reserve currencies as well as some of the developed economy commodity
currencies. Some of the G10 are seen as safe havens and tend to strengthen in
periods of financial market turbulence. other currencies are vulnerable to
volatility and tend to weaken quickly and sometimes dramatically in periods of
risk aversion. We’ve seen some very turbulent financial market conditions
over the past year or so starting with the volatility shock from last January
and carrying on intermittently through the spring and summer on the back of
uncertainty related to Italy and some select emerging markets. We finished 2018
on a remarkably weak note with a lot of trade and Fed driven volatility through
most of q4. Today I’m going to walk you through the g10 currencies as it relates
to their risk profiles and how they tend to behave in challenging market
environments. One of the better-known barometers the market participants used
to gauge financial market volatility is called the VIX which references the
implied volatility for the S&P 500 financial conditions are generally seen
as calm when the VIX is below 15 and market participants don’t usually get
concerned until the VIX inches closer to 20. The VIX reached a high just below 90
the height of the financial crisis of 2008 and is generally peaked around the
45 to 50 range in the post-crisis period. We can generally separate the g10
currencies along a spectrum with safe haven currencies at 1 under the spectrum
and high risk currencies at the other end.
The Japanese yen Swiss franc and US dollar are all generally seen as safe
havens. At the other end of the spectrum you’ll find the Norwegian krone the
Australian dollar the New Zealand dollar and the Canadian dollar. We’ve charted
the correlation of these currencies to the VIX to give you a sense of how they
behave relative to this gauge the yen franc and US dollar have historically
had a positive correlation to the fix strengthening in periods of financial
market turbulence the euro and the British Pound are generally closer to
the havens in most environments however we’ve also seen some clear dislocations
in certain periods and specifically through the European debt crisis as well
as brexit a negative correlation between the VIX the Krone the Aussie kiwi and
Looney suggests that these growth sensitive commodity currencies tend to
weaken in peer of risk aversion it’s important to
manage risk but in times of volatility it’s equally important to step back and
look at the historical absent flows to make sure that you’re avoiding the kind
of panic that results in selling at the bottom or buying at the top from the
Canadian perspective exporters and those looking to sell US dollars
periods of risk aversion can offer some great opportunities for Canadian
importers and consumers traveling abroad it can sometimes pay to wait for markets
to calm down and for volatility to moderate given that these risk off
periods tend to be short-lived from a longer-term perspective we
continue to feel that the Canadian dollar is undervalued and were bullish
through 2019 and into the end of 2020 we’re expecting a stronger Canadian
dollar reaching 79 cents by the end of this year and 81 cents by the end of the
next you can find more thought leading content from Scotiabank on our website
and you can also follow us on Twitter as well as LinkedIn I’m Eric Theoret
thanks for watching

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