Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ published a report Thursday calling for a further move down in GBP/USD to 1.3800. Halpenny is conscious that “the pound does look under-valued when analysed against other major floating currencies. However, the more extreme under-valuation is against commodity-based currencies rather than against the dollar.” The analysis seems largely to hinge on the relative gloom expressed in Wednesday’s Bank of England quarterly inflation report (QIR). Meanwhile, his comment on the coalition policy document is largely positive: “Both the Conservatives and the Lib Dems appear to have agreed on the need for a substantial package of austerity measures”, although one does wonder whether austerity or laxity would be worse for sterling in the short-term. Halpenny puts his stop at 1.5250.
Hans Redeker and Ian Stannard at BNP Paribas are also negative on sterling after the BoE’s report and they are more negative that Bank of Tokyo when it comes to the fiscal policy implications of the coalition, writing that there are: “fears that the Conservatives’ fiscal tightening plans are being watered down to accommodate Lib Dem policy demands.” Other negatives, such as the fall in the ILO’s employment figures and the break of what was believed to be “key support at the 1.4860”, were cited. BNP’s initial focus is on last week’s 1.4430 low.
On Tuesday, when Cameron and Clegg were fractiously engaged rather than happily married, Stephen Hull at Morgan Stanley said: “Go short GBP/USD for 1.3500”. The view is based on the US economy continuing to recover strongly and sterling suffering from perceived difficulties within the coalition that make “the required tough spending cuts to the public deficit, risking a downgrade by the rating agencies in coming months.” Another negative was that attention might turn temporarily to the UK since “the eurozone’s deficit problems [are] ring fenced for now”. Morgan Stanley’s stop is at 1.5100
For me, the most sterling-negative piece I read was by Chris Giles in Thursday’s Financial Times. Writing of the coalition’s plans, Giles said: “specific – and uncontentious – spending increases and tax cuts are well defined, while the broader objective of large net spending cuts and tax increases remains cloaked in secrecy.”
After taking into account actual committed spending increases: “Mr Osborne will have to announce public spending cuts of £57 billion a year by 2013/14 from a non-protected budget of about £260 billion – cuts of about 22%.”
Giles went on to note: “The next few months will see the government progressively coming clean about these figures, blaming its predecessor for the mess it has inherited” and “will present fresh forecasts for growth and borrowing, which are likely to show that the underlying problem is worse than thought.”
One article, four quotes, every reason to be sterling negative.
