Wake up to Sterling's Potential

Investors are finally beginning to recognise that Europe is in trouble and that the UK is a safer haven for investments than the rather volatile euro, according to Nick Ryder, global currency analyst for Smart Currency Exchange. The European bank stress tests attracted severe criticism from many market players for not delving to the heart of what is on everyone’s minds – sovereign debt and how the region would cope in the event of a default, which makes sterling a safer haven than the euro. “Sterling is roughly 20% undervalued against the euro, so whilst recent moves towards €1.15/ £1 is a step in the direction, there is a long way to go and the pound will be constrained by the ultra-loose monetary policy that the Bank of England is currently pursuing,” says Mr Ryder.

Similarly Mr Ryder believes the US faces the real prospect of a default, which could be the start of a second recession. “The USA’s AAA credit rating is at ‘serious risk’ but unlike the USA, the UK has a credit rating agency-friendly austerity plan in place which (for the moment) is proving enough for the ratings agencies. The UK is in a decent enough place – there is parliamentary resolve to deal with the deficit, the population actually recognises that this is needed and government bond yields are not under threat from the volatility seen elsewhere. If we give it time, the UK and sterling should be in a good place down the line. Patience is most definitely required though,” concludes Mr Ryder.

You can call the economic woe that’s spreading across the EU a sovereign debt crisis but best advice from forex specialists HiFX is not to read the currency markets’ reaction as one of panic.

Director Chris Towner of HiFX provides more insight into the European currency markets. “The sovereign debt crisis in the EU is spreading as the financial markets stand on the threshold between heightened nervousness and panic. The reason for this nervousness is that the crisis is now spreading into countries that are too big to save. Italy is not just the third largest economy in the EU but more pertinently it has the largest bond market and the fear is rising that the Italians may in the future start to struggle with their enormous debt levels, which are approximately 100% of their annual GDP.”

By way of reaction to recent events the euro has suffered. Since the start of July it has fallen by 5% against the US dollar from highs at 1.4577 to lows at 1.3835.

“There are two important points to note here,” says Towner. “Firstly, this is not a panic move in the hugely liquid currency markets of which the euro against the US dollar is the most traded currency pair. In a market that often panics we have seen orderly trading over the last 24 hours, implying that there is a lot of two-way interest below the psychological 1.40 level.

“Secondly, money needs to flow somewhere and we have seen the smaller more stable economies such as Switzerland and New Zealand attract investors seeking some form of a safe haven. The Swiss franc has strengthened since the credit crisis first struck in 2007. Back then €/CHF was trading at 1.68 compared to more recent levels at 1.1600. This 30% appreciation is arguably a reflection of a stable economy, but should not be confused as a reward as in a fragile global economy where price is key, a strong currency may prove a burden into the future”.

So no need to panic, but don’t go taking your eye off the ball either say the experts.