Tuesday 10 October 2017
Whither the Pound Sterling - how low can it go?
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.