Pound Showing Upside Potential vs. Chinese Yuan and Singapore Dollar Say ANZ

The Pound has been going sideways versus a number of Asian currencies ever since last October's lows and over the next 12 months it is expected to continue oscillating but with a bullish bias.

The chart of the Pound-to-Asian currency basket is showing the pair trading in a neat range which looks like an incomplete triangle pattern.

ANZ Bank is of the view that the exchange rate will probably continue trading sideways but that there is more of a risk of a breakout higher than lower.

Key to the Asian basket being looked at above is the Chinese Yuan and the Singapore Dollar:

"At the current level, there is a slight upside risk in both GBP/CNH and GBP/SGD," says ANZ Senior Strategist Irene Cheung.

Indeed, if the GBP-Asia complex is in a triangle pattern the odds firmly favour an upside break eventually since triangles normally break in the direction of the flatter border, which in this case is the upper border. 

The key driver of GBP strength is expected to be from the Bank of England (BOE) raising interest rates at Thursday's meeting, with another rise also expected in the next 12 months.

"We have penciled in a 25bp hike, either this week or at the 14 December meeting," says Cheung.

Another major driver is Brexit negotiations which they expect to eventually end on a positive note for Sterling:

"We are of the view that progress could be made in the negotiations in the near term," says the ANZ analyst.

Pound vs. Chinese Yuan

ANZ offers several trade ideas on GBP-Asia crosses, the first of which is for GBP/CNH.

At the moment the currency pair is trading in a range between 8.45 and 9.00 and ANZ expect it to continue trading in that same range in 2018.

Nevertheless, their forecast is for a progressively higher exchange rate with each quarter, reaching 8.78 (current 8.74) by the end of December, 9.00 by March '18, 9.05 by June '18 and 9.07 by September '18.

"RECOMMENDATION: We expect GBP/CNH to continue to trade in the 8.45-9.00 range. The lower and upper bounds serve as a good guide to buy and sell the cross," says Cheung.  

Pound vs. Singapore Dollar

With regards to the Pound-to-Singapore Dollar, ANZ's Cheung is more bullish, within parameters.

A divergence between the BOE policy outlook and the expected policy trajectory for the Monetary Authority of Singapore (MAS) will probably drive the pair higher.

The BOE is expected to raise rates on Thursday and once again in the next 12 months, whilst the MAS is not expected to increase interest rates until October 2018.

Since money tends to flow to where it can earn the most interest for the least risk the Pound's two hikes to the Singaporean Dollar's one suggest flow into the Pound, strengthening that.

"In the near term, a divergence between BoE and MAS policy could drive GBP/SGD slightly higher," said Cheung.

An optimistic stance on Brexit negotiations supplies further upside to the top of the current trading range at 1.82 later in 2018, although at that point Cheung recommends selling the pair back down into the range.

A move down to 1.75 meanwhile should be bought as it would be expected to rise back up within the range.

ANZ's forecast is for a progressively higher exchange rate with each quarter, reaching 1.81 (current 1.80) by the end of December, 1.86 by March '18, 1.86 by June '18 and 1.87 by September '18.