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Foreign Exchange

FX research roundup: Greece on the back burner, sterling into the frying-pan?

EUR/USD has been flirting with a 1.32 handle and has a decent chance of breaking through the year’s low. So it might seem strange to wonder if the FX market is getting a little bored with the Greece story. Longer-dated Greek yields continue to break records but the FX response lacks energy. This is despite Thursday’s news that, according to Reuters, “Eurostat, the EU’s statistics office, said Greece’s budget deficit would be nearly a full point wider than first expected” (more like fifth expected I’d have thought) and despite the news that Louis Bacon has joined George Soros in pointing out (the bleeding obvious) that the eurozone could breakdown (that was Bacon, Soros said break up). It looks like the triggering of the Greek bailout is in the price (there are rumours this morning that Greece will make some formal application today for the bailout to be triggered). Greece’s problems will remain after the bailout together with the probability of eventual default but, if social unrest doesn’t escalate, the country might take a back seat for a while.

There are a few candidates for the next market whipping boy but surely the UK and sterling must now be favourite. The likely prospect of an evenly divided three-party state will soon be enough to weigh on sterling again. There is one thing I’ve gleaned from the televised party-leader debates so far: the politicians’ refusal to meaningfully confront the realities of fiscal tightening by almost 10% of GDP. Hung parliament or not. And that does not bode at all well for sterling.

What chance then that a consequent sterling depreciation becomes a tacit devaluation? The economy needs a boost from somewhere; it won’t come from the public sector; and financial services will eventually suffer from the increases in regulation and taxes. A devaluation-driven boost to exports might look appealing.

What the US would make of GBP and EUR racing to parity is another matter. In fact with the UK, the EU, Switzerland, China and even Japan all effectively playing the same game, US Senate demand for tariffs would be deafening and a consequent savage drop in world trade more than likely.

But what do the strategists think of sterling?

On Wednesday BNP Paribas published, UK Sovereign risks will undermine GBP, a market focus report. BNP cite IMF data showing that UK sovereign borrowing needs over the next few years will be appreciably higher than either the US or EU. Further, private sector debt is still massively elevated – at 200% of GDP. BNP’s conclusion is that “The highly indebted UK corporate sector suggests that building a capital stock while in competition for capital with the sovereign sector might be a difficult task. The US corporate sector looks better positioned explaining our GBPUSD call of 1.30. We expect sterling to become the next EUR, hence we expect EURGBP to reach 0.97”

Credit Suisse are in fact bullish for sterling. On Thursday morning Credit Suisse’s daily Research and analytics said: “Our economists forecast that retail sales rose 1.0% m-o-m, faster than the consensus forecast of 0.6% m-o-m. We think this would provide further evidence of the recovery and fade market expectations for further QE. We forecast that EURGBP will grind to 0.86 near-term and remain long in our cash portfolio with a 1.61 target.” As it turned out, retail sales were worse than consensus at 0.4% mom. Credit Suisse’s Friday research was not available as we went to press.

JPMorgan’s weekly research wanted to “caution against over-optimism on sterling if the Conservatives carry the May 6 elections: the fiscal task remains enormous and the historical experience across countries [of major fiscal consolidations] is currency bearish.” JPMorgan doesn’t advocate a sterling cash position and, in fact, is short of the six-month GBP/USD against USD/CHF volatility swap saying: “We continue to believe that the GBP/USD vol premium will decline once the event risk of the upcoming election has passed.” Yes, the old option trader post-event vol trade: often works a dream. But maybe the election isn’t an event but a sideshow.

If you are waiting for the bit about Turkey we won’t disappoint you. We quote this week from Morgan Stanley research: “We expect this recent [TRY] outperformance to continue as monetary tightening gets under way and the CBT continues to shift towards the exit, and we see some funds rotating out of long ZAR positions, for example.” To that end Morgan Stanley actually suggest “that one way to play for TRY strength is via short ZAR”. I must admit I have never put on a cross in that pair but it could be one to watch – it would have been around 4.9700 when the note went out.

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