Time to stop bashing the pound – SBM long sterling call

Well, in complete contrast to the UK’s FTSE 100 which has stormed to new 5 year highs in recent weeks, that other bellwether of Great Britain – the good ‘ol pound has had a shocker of a start  to the New Year. In just over 4 weeks it has fallen some 5% against the Euro and just under 3.0% against the US Dollar – very large moves for a currency, particularly given that leverage in the FX markets runs to hundreds of times.

Despite the best efforts of Mervyn King & his fellow “doves” on the MPC with the large QE cash injections into the British economy in recent years, sterling was actually up 2.4% and 4.6% against the Euro and the US Dollar respectively in 2012, but now it seems a reversion is underway.

Following “Super” Mario Draghi’s comments at the now infamous conference held in London in late July of last year where he promised to save the Euro “whatever it takes”, the pound has reversed sharply against the Euro – languishing presently around a woeful 1.16 against the previous highs of 1.28/9. With all the talk of exiting the EU, expectations of a UK AAA sovereign debt downgrade and a continuation of our moribund economic environment, traders have come to view the pound as something of a one way bet and it is difficult to find a bull presently (with the exception of RBS). Given the heavily oversold status of the pound and it being undoubtedly undervalued on a PPP basis, this overwhelming negative sentiment has naturally got our contrarian noses twitching…

There are also early signs that the Bank of England is moderating its attitude towards continued monetary easing, evidenced by the maintenance of the QE stimulus at the current £375 billion level. We doubt the new incoming Governor Mark Carney will crank up the printing presses when he arrives, even though the economic data coming out of UK Plc has been lacklustre in recent weeks, particularly when compared with US. In fact, the latest minutes from the Bank of England revealed renewed concerns over UK inflation as the CPI number rose 2.7% on a yearly basis. Carney will certainly not want to start by giving the impression that he is “soft” on inflation.

The 4th quarter UK GDP figure decreased by 0.3%, more than expected and the economy entered a technical “triple dip”, frustrating the economic recovery once more. Manufacturing and construction PMI data has also been showing contraction and the latest industrial production reports showed higher than anticipated drops. If we mix this with the renowned positive sentiment coming from the latest consumer and business surveys in Germany and from the positive data regarding sovereign debt markets in the Eurozone, it seems all too easy to understand why the pound has been under pressure, certainly when set against the Euro where ECB policy has effectively been tightening in recent months. The outperformance of the Euro v the pound seems logical.

Cameron’s stance on a EU referendum has also added fuel to the sterling bears thesis through creating additional uncertainty but we think this to be a sideshow a best.

We however think that consensus market opinion is missing one factor and that is that even though George Osborne has been resolute until now that the austerity measures are here for good, and he has been reliant upon monetary policy to supply the priming to the economy through ultra loose measures including QE, it is very apparent now we are into the 3rd year of the Coalition that this is not working. This, together with the fact that we are now just over 2 years away from an election and the Conservatives will not want to be cast back into the wilderness for another 15 years (Gawd forbid those nuts from Labour get another chance to re-wreck our economy!), is precisely why I believe “Boy” George is likely to look to add some stimulus to the economy. In fact he has no choice (unless he wants to lose his job). If he changed the growth profile of the UK through holding back on the austerity measures and so potentially forcing the BoE to raise interest rates modestly as a counterbalance, the vast undervaluation against certain currencies like the Australian dollar, Singapore dollar and Euro would narrow very sharply, and likely very quickly as market participants are caught off guard. We are particularly bullish the Pound against the Aussie dollar and for a thorough piece on our stance, click here (page 76) – http://issuu.com/spreadbetmagazine/docs/spreadbet_magazine_v13_generic?mode=window&pageNumber=1

We believe the pound is undervalued, oversold, unloved and that the market is not taking on board the scenario painted above. In short, contrary to expectations of a “run” in the Pound, as Soros said in recent days, this has already occurred in part and thus there is material fuel for Pound buying in the mix. The Pound is due a rebound.

We have today opened a Long GBPEUR spot FX position around 1.1567 and sold GBPUSD Puts for April with a strike of 1.54 @ 93 aswell as opening a short USDYEN position at 93.90. If you’d like to be involved in our forthcoming launch of our Titan managed spread betting funds, then email TITAN to editor@spreadbetmagazine.com