Andrew Garthwaite of Credit Suisse has come over all Krona-esque on the sterling.
From his global equity strategy note:
We think that £/$ could weaken to 1.35 as we believe seven factors are worse than the US: UK consumer leverage, UK banks leverage, UK fiscal position, the rise in inflation swaps, the overvaluation of housing, the reliance on QE to fund the budget deficit and, although UK economic momentum has improved recently, it’s still worse than the US. Sterling trades in line with PPP against the dollar and we believe that sterling should fall to 10% to 15% below PPP. Sterling is already 18% cheap against the Euro but it might become cheaper (the post 1979 low is 26%). Current opinion polls are consistent with a minority government which adds to the policy uncertainty.
Sterling was certainly headed in that direction on Friday, although at least some of that move was attributable to the strength of the dollar, rather than Sterling weakness:
Yet a cable rate of $1.35 is a long way from here. Why the pessimism? We’ll let some pictures do the talking…
More positive thinking from Credit Suisse in the Long Room.
Have a good weekend everyone!