Sterling: Peak Growth May be Behind Us, SocGen’s Juckes

U.K growth may have already peaked, according to Société Générale’s Kit Juckes.

In a reaction to this morning’s soft GDP data, Societe Generale’s Kit Juckes, said he thought that the peak in growth during this cycle may be “behind us”:

In a research note he stated: “but even so, it looks as though the peak growth in the cycle is behind us and with the MPC pushing thoughts of rate hikes well into the second half of 2016.”

Given several major banks were targeting a BOE move as soon as May, a delay to the second half of the year could be a major blow to sterling, if such an expectation grows legs.

Juckes even argued, it’s possible that there will be no change in rates at all, as happened in 2015, even with all the hype:
“it's by no means certain that rates will rise at all unless forced to by, say, a post-Brexit currency crisis.”

As a result, the SocGen analyst is bearish the pound:

“Which, of course, fuels my belief that sterling may have a rough time in 2016.”

Current Account like ‘Brazil’s’

Data from the Office of National Statistics showed the Current Account deficit narrowed to -17.5bn from -21.5bn when -21.5bn had been expected.

This was not as positive a reduction as it looked, as the Trade Deficit component almost doubled to -8.7bn in Q3 from -4.7bn in Q2.  

It was only because of a rise in the Trade in Services Surplus to 1.4bn and a narrowing in the deficit in Investment Trade, that the Current Account (C/A) improved.

Nevertheless, SocGen’s Juckes put a positive spin on the figures:

“Cheer up, there's a decent chance the UK's 2015 current account deficit will now end up (just) below 4% GDP, a dramatic improvement on the 6.2% we saw in Q4 2014.”

Relatively speaking the deficit is high:

“while a sub-4% deficit will still be comfortably the worst in the G7 economies, it'll probably be smaller than the deficits we see this year in Australia, New Zealand or Turkey. On a par, perhaps, with Brazil's deficit though that's hardly cheerful company from a currency market perspective!”

Outlook for sterling souring

Juckes is not the only 2016 sterling bear.

Deutsche bank’s currency analysts also forecast the pound depreciating next year.

Their research leads them to believe that the dollar’s performance versus other currencies ‘rotates’ and that it is the pounds ‘turn’ to weaken against the greenback in 2016.

Dollar strength rotation starts with yen, then goes on to the ‘fragile 5’ – the Indian Rupee, SA Rand, Indonesian Rupiah, Turkish Lira and Brazilian Real, and then moves to the euro and commodity currencies.

According to the report, two currencies stand out as having so far avoided USD strength, and these are the British Pound and the Swiss Franc.

Partly because of this delaying of weakness Deutsche see weakness ‘catching up’, particularly with sterling, probably in 2016:

“In 2016, the GBP is likely to remain vulnerable most obviously against the USD. The pound in particular should suffer from a mix of fiscal contraction constraining the BOE tightening cycle, making a C/A deficit of near 5% of GDP more difficult to finance, most especially in the face of ‘Brexit’ uncertainties.”

Deutsche sees GBP/USD potentially falling to 1.35-1.40, “In 2016/7,” and the “bottom end of the range that has prevailed for 30 years.”