Shadow currencies head for bigger future,

Extrait de: Shadow currencies head for bigger future, By Mansoor Mohi-uddin, FT, August 3, 2011

The conventional wisdom that the haven Swiss franc outperforms during times of risk aversion, while the Australian and Canadian dollars appreciate when risk-seeking investors shift into commodities, has become undone this year as all three currencies have surged against the US dollar and the euro.

Instead, the Swiss franc, Canadian and Australian dollars are being increasingly traded in the foreign exchange markets as they represent an alternative group of ”shadow currencies” for investors wishing to take directional views on the world’s three leading economies: America, China and Germany.

Traditionally, investors used the G3 currencies to bet on the major economies. But the dollar, euro and yen have become an imperfect exchange rate bloc. In Asia, China’s economy has overtaken Japan’s. In Europe, the eurozone encompasses Germany but also distressed members such as Greece. And in the US, the economy remains fragile after the credit crunch.

As a result investors have turned to alternative currencies and the Swiss franc, Canadian and Australian dollars have gained in prominence both in terms of daily turnover in the global currency markets and in the composition of central banks’ foreign exchange reserves.

These “S3” currencies lack the liquidity of the G3 currencies. But they have advantages.



First, close trade links make the Canadian dollar, Australian dollar and Swiss franc substitutes for the US dollar, Chinese yuan and old Deutschemark respectively.

·         In North America, three-quarters of Canada’s exports go to the US.

·         In Europe, Germany accounts for one-fifth of Switzerland’s exports, and,

·         in Asia, China buys one-quarter of Australia’s exports.

Thus, Canada’s economy is correlated with changes in America’s business cycle. Similarly, Swiss GDP shows a clear relationship with Germany’s IFO business confidence index while Australian growth has begun to follow shifts in Chinese industrial production.

As a result,

·         Canada’s currency is a proxy for America’s,

·         Switzerland’s behaves as the former Deutschemark would have and

·         Australia’s is a shadow for China’s.



Second, none of the S3 bloc is hampered by fiscal risks or weak growth.


For example, Canada has emerged from the credit crunch in much better shape than America. Its gross government debt as a share of GDP is significantly lower than that of the US, and the Bank of Canada has begun to normalise monetary policy by raising interest rates.

In contrast, the Federal Reserve has been forced to undertake two rounds of quantitative easing since 2009.

Therefore, Canada’s currency offers exposure to America’s economy without being hindered by weak fiscal or monetary fundamentals.


Australia, like China, has a very low ratio of gross central government debt to GDP. But Australia does not have China’s big local government debts. UBS estimates such debt in China may be as high as 30 per cent of GDP.


Switzerland, like Germany when it had the mark, has an excellent fiscal position. In the next few years the International Monetary Fund expects Swiss gross government debt to fall below 50 per cent of GDP. German finances, like others in the eurozone, have been adversely affected by the credit crunch. In addition, the Swiss National Bank now has large foreign currency reserves exceeding US$200bn after the central bank intervened actively in 2009 and 2010 to check the franc’s appreciation. With its large gold holdings, the SNB seems reminiscent of the Bundesbank in the days when Germany’s central bank, too, held substantial foreign reserves before the advent of the euro in 1999.



Last, all the S3 currencies are freely floating.

In contrast, the yuan remains subject to substantial capital controls and continues to be pegged against the US dollar. Moreover, each may be traded, unlike the defunct mark.

In short, the Swiss franc, Canadian and Australian dollars allow investors to hold:

·         a core European currency without the eurozone’s debt burdens,

·         a North American currency without America’s fiscal baggage or the Fed’s quantitative easing,

·         and a shadow currency for China’s economy without capital controls or currency pegs.

As a result, the Swiss franc has made new all-time highs against the US dollar and the euro this year, the Australian dollar has hit three decade highs against the greenback and the Canadian dollar has almost reached record levels too.

But investors should also note that the new-found status of the shadow currencies cuts both ways. If the eurozone debt crisis engulfs Germany, forcing it to raise taxes and cut spending to assist large economies like Spain or Italy, then the Swiss franc is likely to be dragged down too. A hard landing in China would knock the Australian dollar off its perch while a recession in America would weaken Canada’s exports and currency just as the financial crisis did dramatically in 2008.

Mansoor Mohi-uddin is managing director of foreign exchange strategy at UBS