Tuesday, 10 October 2017

Whither the Pound Sterling - how low can it go?

Currency valuation

This is an interesting graphic from Deutsche Bank, out today.

It shows a trade-weighted view of the major currencies.

The interesting parts are that the Chinese Yuan in the most over-valued currency in the world, no wonder so much hot money is leaving China to be invested elsewhere. However the Swiss Franc has also been top of the list forever, with no signs that will change any time soon.

Whilst the US Dollar is perfectly in the middle, the British Pound is well placed on the list, a little lower than the Euro and thus prone to generating some inflation in the economy which is what we are seeing. Bizarrely, QE happy Japan remains the world's cheapest currency and also a country of near-zero growth. The monetary economy of Japan is clearly not working or functioning properly anymore, but that appears to matter little to its wealthy denizens.

The reason I went looking for this is I was wondering what a no deal on Brexit situation will do to the pound, currently the markets are very pro-GBP as they judge we are in a low of Brexit inspired political morass. This can unwind quickly. However, it would seem to me they look at charts like the above and see there is far more upside than downside to the GBP position, especially as interest rate rises are now on the near horizon.

FX is notoriously hard to predict which is why traders make so much money...out of commissions rather than the gambling! However, even in no deal scenario it looks like the fundamentals of the UK would keep sterling at parity with the Euro or thereabouts and at no worse than around $1.15 to the £1. It would be a case of buy the dips.

We can also tell from other data that the UK is currently, under-priced, tourism is at an all time high, which is always suggestive of an undervalued currency.


Steven_L said...

However the Swiss Franc has also been top of the list forever, with no signs that will change any time soon.

Switzerland as the next Enron is the ultimate black swan event I reckon.

andrew said...

not until the last cuckoo clock stops and the last nice piece of chocolate is eaten.

Personally, I think it will be car loans wot does it - hardly original - but credible.

Dick the Prick said...

As an analyst I love diagrams like this. Pop 'em up on a powerpoint and to the crowd 'says it all, really'. Preferably with loads of colours.

Nick Drew said...

You are the man who called the top @ $2.10 a decade ago!

which more or less kept me whole against the 08-09 debacle. Respec!

Steven_L said...

Personally, I think it will be car loans wot does it - hardly original - but credible.

You might have a point.

I just got my arm twisted by the local Jaguar garage into taking out a dirty great one of them the back end of September. As if dieselgate wasn't enough, apparently our friends over the channel are boycotting our goods now. I only went in to avoid a trip to Primark and New Look and have a cheeky test drive. There I was expecting him to come back with the usual insulting offer when he thrust 23% off a new XE at me. I nearly spat my coffee all over him. It was £3k more than the best online car broker was doing.

In stock too, so £500 down, HP settled on my last car (which was more or less private sale price) sign a 4 year 'PCP' and pick it up in 4 days time. But there is no such thing as a 'PCP'. It's a regulated hire purchase agreement that I am legally entitled to treat as a 38 month lease and hand back the keys to one and a half tonnes of negative equity.

But the big problem with this thesis can be summed up in 2 letters - "QE". Central banks will simply bail out the big car makers. They are too important. I have a sneaky suspicion that the Fed and ECB already have been doing precisely that.

CityUnslicker said...

SL - re car your point is well made, the issue being it is the Car Finance companies on the hook, not Barclays or Lloyds, they are much less of a systemic risk.

In fact, maybe we will all get free cars out of it, or at least get to negotiate what we pay back with the administrators. Cant see the UK Govt bailing out PSA or Volkswagen myself.

I will do a post in due course.

Graeme said...

The BoE is all over the car finance market at the moment. A couple of posts on the "unofficial" Bank Underground blog, the odd hint dropped by his Carneyness...