Pound Sterling's Rally vs. Euro and Dollar has Further to Go: Credit Suisse, TD Securities
Above: Shahab Jalinoos, foreign exchange strategist with Credit Suisse © Pound Sterling Live, image courtesy of Bloomberg
Foreign exchange strategists have been reacting to the latest bounce in the value of the British Pound, saying the currency has established the momentum to allow it go higher still.
The UK currency was bid higher in midweek trade on reports the EU would offer the UK a long delay if requested in March, one that could last up to 21 months with the stability such a delay would offer UK businesses welcomed by markets, prompting traders bid the Pound to fresh highs against the U.S. Dollar and the Euro.
The Pound-to-Euro exchange rate rallied to a record a fresh two-year high at 1.1727 on Wednesday, before fading those gains to quote at 1.1657 ahead of the weekend as the rally was subject to profit-taking at the turn of the month. The Pound-to-Dollar exchange rate rallied to record its highest level since July 2018 at 1.3348, before paring gains to trade at 1.3298 with a set of better-than-forecast U.S. GDP data helping the Greenback higher across the board.
Looking ahead, Shahab Jalinoos, foreign exchange strategist with Credit Suisse says the current upside momentum in Pound Sterling can extend further.
Asked whether the Pound was pricing in a 'soft' Brexit, or a 'Theresa May-backed' Brexit, Jalinoos replied "I think we are getting there, there is still more room to go."
Jalinoos has taken a look at the foreign exchange options markets that show 'implied volatility' in Sterling is a great deal higher than in other major currencies. In short, this suggests markets continue to expect sizeable moves in the Pound at future dates.
"We would imagine that if the risk premium were to fall still further and those volatility levels come down that the spot exchange rate for the Pound will also go higher," says Jalinoos told Bloomberg's Francine Lacqua.
The Pound's 2019 rally has been built on the market's growing assessment that a 'no deal' Brexit is unlikely on March 29. This assessment grew in popularity this week after Prime Minister Theresa May told parliament she would allow MPs to vote on a 'no deal' Brexit if her deal is defeated when she next puts it to parliament. If parliament rejects a 'no deal' they will then have the opportunity to vote through a Brexit delay, thus avoiding a 'no deal'.
But, how high could Sterling go in the short- and medium-term?
Jalinoos has his eyes on 1.35 for the Pound-to-Dollar exchange rate and 0.85 for the Euro-to-Pound exchange rate, this equates to a Pound-to-Euro exchange rate of 1.1765.
"Those are achievable still in the next few days or weeks," says Jalinoos,
Looking beyond this time frame, Jalinoos warns the Pound's rally could come to an end in March:
"The problem comes as we get into March and we get to the point where there is actually a vote in parliament... and we get the extension, let's say until June, the market may then need to start repricing it again, some risk that you do actually end up with no deal at that point in time so that could be where the Pound's rally comes to an end.
"But for the time being it does have some momentum behind it," says Jalinoos.
Mark McCormick, Director and North American Head of FX Strategy for TD Securities says there is the prospect that "momentum builds on momentum" as traders cancel their 'short' bets on the Pound, which would in turn sees the currency bid higher.
A 'short' on the Pound is a bet that it will fall in the future, closing out such a bet inevitably requires the currency to be bought. Hence, when the market shifts out of a short position against an asset, that asset tends to push higher.
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McCormick says alternative outcomes to a 'no deal' Brexit are heavily favoured at the current juncture, allowing 'real money' investors to "dip their toes back into UK assets, they are buying UK equities and I think as we get closer to the 1.35 level this is when that community will start removing their hedges which reinforces some of the upside".
The observation on 'real money' buying into UK assets comes as the world's largest sovereign wealth fund says it is looking to invest billions of pounds in Britain.
Norway’s £740 billion wealth fund said yesterday that it would increase its exposure to British companies, property and bonds regardless of the outcome of Brexit negotiations. Yngve Slyngstad, the fund's chief executive, said: “Wwe will continue to be significant investors in Britain. We foresee that over time our investments in the UK will increase."
"In the short-run any kind of delay is really good because I think what most people want is a way to assess whether we get a 'hard' Brexit, so if you can remove the binary risks of staying or leaving, the timeframe for any kind of extension is really going to reinforce the rally we have seen in the short-run," says McCormick.
"But if it becomes a 20-month or two-year kind of deal people start thinking this is a gentle way of easing through the status-quo and that we may end up with some very soft version of Brexit the longer it is delayed, the longer it gets delayed the more bullish it becomes for Sterling," adds the strategist.
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