7 REASONS TO SELL THE POUND
UBS says the British Pound could decline to $1.35 by year-end. In a recent strategy note they listed 7 reasons why the Pound could decline for the remainder of the year:
1) the pound has rallied because Bank of England Monetary Policy Committee member Andrew Sentance voted to raise interest rates. But the rest of the MPC seems unlikely to join him.
2) the pound has also rallied recently because of the new government’s Budget announcement.
3) the scale of budget cuts envisaged over the next four years – on average the UK fiscal deficit will be reduced by 2% of GDP each year – presents risks to growth.
4) exports can’t be relied upon to take up the slack. Britain’s main trading partner is the Eurozone, not resilient emerging markets. Despite sterling’s weakness over the last two years, the UK trade balance has not improved significantly as the Eurozone has also weakened.
5) the MPC remains willing to resume quantitative easing if the economy weakens. Though the BOE stopped purchasing Gilts in February, its policy setting committee has stressed that quantitative easing has been paused rather than being terminated. Thus if fiscal tightening later in the year does cause economic growth to falter, the MPC is likely to respond with more Gilt purchases if it feels it will miss its inflation target in two year’s time.
6) tighter fiscal and looser monetary policies can result in a much weaker pound as sterling’s performance after the 1981 austerity budget shows. In the early 1980s the pound fell for several years against the dollar and the German mark after the UK government cut the budget deficit and the Bank of England responded by cutting interest rates from 14% to 12%.
7) other major currencies have also experienced similar prolonged weakness when the authorities have tightened fiscal policy and loosened monetary policy during times of economic weakness.
How to play it? UBS likes put spreads on the Pound and straight short positions:
“Sterling is likely to weaken substantially in the second half of the year. We already recommended buying two month GBPCHF put spreads with 1.6300/1.5425 strikes on June 10. We now also recommend clients add to sterling shorts by selling spot GBPUSD at 1.4975 with a stop above the recent highs at 1.5270 and an initial target of 1.4000.”
Source: UBS
Decent analysis, but that’s not what appears to be driving currencies anymore. Its either “risk on” or “risk off”. The GBP is a “risk on” currency. As long as equity markets do ok, as long as no big blowups occur, the “risk on” currencies (GBP, Euro, AUD to name 3) will do fine. A short of GBP/USD is no more than a short of the S&P 500.
I’m not saying that stocks won’t go down or that another big blowup won’t occur, but am saying that this will determine the fate of the GBP and other “risk” currencies.
“We now also recommend clients add to sterling shorts by selling spot GBPUSD at 1.4975 with a stop above the recent highs at 1.5270 and an initial target of 1.4000.”
Looks way out of date to me. The GBP/USD stop was hit in mid July!
i do think that gbp will regain to 1.66 region after that it will rally downside for target of 1.32
UBS don’t seem to be the people to listen to regarding currency movements. I know this article is quite out of date as I remember it being commented on some time ago. So far they’ve been stopped out of a short position as GBP blew through the 1.5270 level and now it has gone to 1.66+ against CHF their options strategy looks equally flawed. Perhaps the genius making these pronouncements would care to put his name to them?
I assume that note must have been put out on July 12th. At the time it would have seemed a reasonable call.
However now with GBPUSD @ 1.59, without breaking through resistance in the 1.57-1.60 region and RSI @ 70+ and stochastics @ 90+ shorting now seems a low risk play. Even if the uptrend were to continue (we are now clearly above the 200 day EMA) a pullback to the 20 day EMA is quite likely. With a stop above the recent highs and a target at or near the 20 day EMS that’s a 3:1 ratio.
I wonder whether the EURUSD is a better short though at this stage..sitting right a resistance and the 200 day EMA. Target to the 20 day EMA is only 200 and a bit pips…but will it hold?
Thoughts?