Friday, September 18, 2009

The Weak Pound

While most other freely floating European currencies have appreciated (risen) in value against the euro in recent weeks, the U.K. pound has now again seen its value depreciate, with the euro again rising above 90 pence.

Many analysts are now predicting that the pound will reach parity with the euro. I wouldn't be too sure about that, but it is certainly a real possibility. While the yen, the U.S. dollar, the Swiss Franc and the Euro to varying degrees have been "low beta" safe havens during the financial crisis, most other currencies have had the status of "high beta" assets, which appreciate in value during stock market rallies, and depreciate during sell-offs.

With global stock markets being very overbought, a big downside risk on "high beta" currencies exists. The relevant question with regards to the pound is whether the recent slide despite elevated stock prices reflects a transformation of the pound from a "high beta" to a "low beta" asset in the minds of investors, or if it reflects some independent (separate) weakness of the pound.

At this point, it is too early to tell. But either way, the pound does not look like a good bet. If it represents some independent weakness then it is almost per definition not a good bet. If it represents a transformation into a "low beta" asset it does not look good either given the overbought conditions of stock markets.


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