Thousands of Cypriots who having borrowed in Swiss francs (CHF) for housing or other purposes and who were enjoying the double advantage of low interest rates and a depreciating currency, risk an upset in the exchange rate between the Cyprus pound and the CHF following expectations that the Fed will reduce interest rates in the US and thus lead to a flight to quality.
Such a flight to quality to currencies with surpluses on their current accounts as interest rates narrow is expected to stem a reversal of so-called carry trades, whereby investors used the CHF and the Japanese yen (JPY) as their funding currencies (borrow) and converted the proceeds into high yielding currencies like the Australian dollar, the New Zealand dollar, the US dollar and to a lesser extent the euro and sterling.
Analysts at BNP Paribas warn in their latest research that there is a significant risk of a reversal of carry trades as interest rates narrow. While information on the short CHF positions in the market is unavailable, but the Bank of Japan estimates that similar positions in the JPY are the equivalent of up to USD 63 bln.
BNP Paribas analysts said the trend of the CHF and the JPY will be determined by global issues such as liquidity, risk appetite and global economic growth prospects. These factors worked against the CHF over past years, but are now turning to the CHF favour.
Analysts suggest that following the test of 1.60 on EUR/CHF and the correction seen since to 1.5850, any rallies to 1.5920 should be sold as the technical charts show a breach below the 5, 10, 30 and 90 day moving averages, opening the way for a test of the 200-day moving average, now trading at 1.5740.
Around a third of foreign currency loans in
Until recently, those who had borrowed in CHF, not only took advantage of 2.75% against borrowing in Cyprus pounds and 1.50% against borrowing in euros, but they were also making additional money because of the steep and continued decline in the value of the Swiss franc against the CYP.
Since two weeks ago, the CHF has corrected mildly to 0.3650 from 0.3635, and may be on course to reach the beginning-of-the-year level of 0.3685.
Compared to a year ago, the difference is 2.6%, since in November 2005 the CHF was worth 0.3730 (2.6810) to the
Investors should be aware of the warnings issued by the Central Bank of Cyprus regarding the danger of borrowing in foreign currency and their exposure to an adverse movement in exchange rates.
