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Sovereign risks dominate assets returns in first half

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Surging risk aversion and European sovereign concerns were the key drivers of currency returns in the first half of 2010, research by ETF Securities shows.

ETFS Long Yen Short Euro was the top performing currency ETC, rising 23 per cent in H1 2010 as the Euro sank on growing concerns about sovereign risk in Greece and other peripheral European countries.

With sovereign risk expected to remain a serious concern amidst rising uncertainty about the durability of the global recovery, these themes are likely to remain key  drivers of returns during 2010 and 2011, ETF Securities says. Countries that implement credible debt control programmes will likely see currency outperformance.

ETFS Short EUR Long USD rallied 15 per cent in H1 as the sovereign debt crisis sparked broader concerns about the long-term viability of the Euro. Despite investor concern about growing US debt, the perception of the Euro as a credible alternative to the US dollar began to unravel.

Although the EU and IMF produced a policy package to address debt and banking sector issues, the sovereign debt crisis refocused attention on the wide structural economic disparity within the Eurozone. As a result, the Euro has suffered a loss of confidence that could impact FX markets for years to come.

Most key emerging market economies such as China and India held up well through the financial crisis and investors are increasingly looking at emerging market currencies as a way to benefit from their growth while avoiding the company, regulatory and political risks associated with investing in most emerging market equities and bonds.

Europe’s first long and short Chinese Renminbi and Indian Rupee currency ETCs were launched in June 2010. The launch coincided with news that China was de-pegging its currency from the US dollar and reverting to its pre-crisis policy of a managed float of its currency.

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