IFAs should not panic over euro crisis

You can call the economic woe that’s spreading across the EU a sovereign debt crisis, but best advice for IFAs with international clients is not to panic over currency markets, says forex specialists HiFX.

Director Chris Towner provides this insight into what’s going on. “The sovereign debt crisis in the EU is spreading as the financial markets stand on the threshold between heightened nervousness and panic. The reason for this nervousness is that the crisis is now spreading into countries that are too big to save. Italy is not just the third largest economy in the EU but more pertinently it has the largest bond market and the fear is rising that the Italians may in the future start to struggle with their enormous debt levels, which are approximately 100% of their annual GDP.”

By way of reaction to recent events the euro has suffered. Since the start of July it has fallen by 5% against the US dollar from highs at 1.4577 to lows at 1.3835. “There are two important points to note here,” says Towner. “Firstly, this is not a panic move in the hugely liquid currency markets of which the euro against the US dollar is the most traded currency pair. In a market that often panics we have seen orderly trading over the last 24 hours, implying that there is a lot of two-way interest below the psychological 1.40 level.

“Secondly, money needs to flow somewhere and we have seen the smaller more stable economies such as Switzerland and New Zealand attract investors seeking some form of a safe haven. The Swiss franc has strengthened since the credit crisis first struck in 2007. Back then €/CHF was trading at 1.68 compared to more recent levels at 1.1600. This 30% appreciation is arguably a reflection of a stable economy, but should not be confused as a reward as in a fragile global economy where price is key, a strong currency may prove a burden into the future”.

So no need to panic, but don’t go taking your eye off the ball either.
www.hifx.co.uk