When the term “safe haven” is brought up, the U.S. dollar, Japanese yen, Swiss franc, and gold are usually the first things to come to mind. But lately, one currency has been acting more and more like a safe haven, at least in Europe. Everyone, meet the British pound!
With risk aversion back in vogue, investors have recently been treating the pound like a safe haven, favoring it over the euro, and surprisingly, even the franc! What’s gotten into the markets, you ask? It’s all about fundamentals and monetary policy!
When it comes to fundamentals, we can’t deny that the U.K. has got the upper hand against the euro zone. The European debt crisis has made the euro one of the weakest currencies as of late as it has dealt heavy blows to economic activity and the outlook for the euro zone.
Just recently, we got a glimpse at the huge disparity between growth in the U.K. and the rest of the Euro area. In Q3 2011, the U.K. recorded a growth of 0.5% in GDP, beating forecasts which called for a 0.3% expansion. In comparison, the Euro area as a whole only expanded 0.2% in the same quarter, which is a clear indication that the U.K. performed above average.
The British pound also trumps another European currency, the Swiss franc, in terms of exchange rate policy. You see, traders have been feeling uneasy about buying up the franc because of the ever-present threat of currency intervention by the Swiss National Bank (SNB).
Another thing worth noting is that the British pound still strengthened by more than 1% against the Swiss franc despite the Bank of England’s (BOE) expansion of its asset purchase program in October. One reason that could explain this is that the BOE’s additional round of stimulus looks relatively modest in comparison to the ginormous expansion of the Swiss monetary base.
Now that I’ve mentioned some factors that are keeping the pound afloat lately, better take note of these things while trading pound crosses. Bear in mind that, given the current market dynamics, the pound could be in for more gains against its European counterparts. If risk aversion persists, that is.