Friday, July 15, 2011

Nomura: EUR/CHF has potential for further decline

Strategists at Nomura Securities believe that in the current situation of high uncertainty about when the European leaders will come up with a solution of the debt crisis investors should avoid the single currency. The specialists warn that it may take weeks for some developments in dealing with the current problems of the indebted euro zone’s nations.

Nomura notes that EUR/USD is a very liquid instrument. For a long time the pair corresponded to the ups and downs in risk premiums on sovereign bonds. Since February, however, this correlation has become not that clear as the single currency gained versus the greenback on the rates differential between the European Central Bank and the Federal Reserve. Now the risk premium on euro has once again begun increasing, but the state of things in the region has significantly deteriorated.

As a result, the economists draw a conclusion that EUR/USD responds to sovereign risk only when it triggers systemic risk like it’s happening now.

That’s why Nomura recommends trading not EUR/USD, but EUR/CHF regarding short positions on this pair as a sure gain as this cross has been very closely correlated with measures of systemic risk in the monetary union. So, the bank recommends being bearish on euro versus franc even though the pair’s already trading at the record minimums.

daily eurchf 17-39

Chart. Daily EUR/CHF

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