What’s that up ahead? A glimmer of light on the horizon for the Great British Krona — currently suffering from record lows on a trade-weighted basis?
Bank of America seems to think so, at least relative to the USD.
The factors lining up against the GBP have been formidable, with house prices falling sharply, employment in the important financial services industry declining and, as result, interest rate expectations weakening steadily. While the futures markets imply a terminal BoE base rate between 0.75% and 1.00%, there has been market talk about the potential for quantitative easing in the UK, factors that have likely contributed to the GBP weakness. Reflecting the worsening negative sentiment, while the speculative community has reduced net short EUR positions to modest levels (about -6,600 contracts), the net short GBP position versus the weakening USD has held at a large -30,400 contracts.
Indeed. The trade-weighted GBP (Sterling against a basket of currencies) was sent to a fresh low yesterday, following comments by the Bank of England’s John Gieve. The deputy governor said Britain’s central bank needs “new tools” (other than interest rates) to manage the economy, renewing speculation that the UK could start quantitatively easing à la the US (of note though, is that some, such as Marc Ostwald at Monument, think it’s already started). Cue a rush of traders betting on lower interest rates and a lower pound.
But, there’s some good news.
Bank of America, for one,thinks the decline is overdone (emphasis our own):
While there are reasons to justify some of the weakness of the GBP versus a broad array of currencies, it appears the selling versus the USD has become excessive. While markets are concerned about the potential for quantitative easing from the BoE, the Fed already has undertaken that aggressive step, nearly double the outstanding level of the monetary base since the 2-week reserve period ended September 10 (+96.6% by the period ended December 17). This aggressive effort by the Fed has cemented expectations for an extended period of a near-zero Fed funds rate, bringing term rates lower. As a result, even though UK rate expectations have declined steadily, the 2-year swap rate differential actually has risen versus the US, suggesting a GBP/USD rate closer the 1.60 than the current rate under 1.48.
Perhaps we’ll be able to afford that Las Vegas vacation after all…
Related links:
We can collapse our own currency thank you very much - FT Alphaville
Pound edges closer to parity with euro - FT
