GBP:The Great British... Peso?
The Great British Pound is coming under fire again. Not for the first time, mischievous strategists are suggesting that the British currency faces ‘emerging market’ issues (which is beautifully ironic for a country that boasts the fifth largest economy in the world).
Bank of America strategist Kamal Sharma explains:
“Whilst not wishing to over-exaggerate GBP’s predicament as some kind of ‘end-of-days’ scenario, we are concerned that the increasing politicization of UK policy undermines the GBP in ways that would appear EM-like,”
“We sense something is changing in the UK, with the BOE increasingly hard to decipher and less transparent; a failure to discuss and acknowledge that Brexit has been a significant headwind to the supply side; and a sense that the BOE is losing control over its mandate.”
“The UK current account deficit is not a new phenomenon. But what has changed has been liquidity and trading conditions around GBP and one of the most challenging macro/policy backdrops in almost a generation,”
The language used is fascinating. “We sense something is changing in the UK… and a sense that the BOE is losing control over its mandate”
Perception is important, and there’s little doubt that the UK’s response to energy-fuelled inflation has been implemented in a somewhat haphazard way.
However, it HAS been implemented, and households can now expect some relief on their energy bills this year. Likewise, it’s still unclear just how much ANY central bank should be hiking to deal with inflation that is largely attributed to supply problems and energy costs.
Goldman Sachs don’t take things as far as BofA but their FX strategists argue that although the fiscal measures will assist, they won’t do much to alter the overall path for the economy. They also argue that the Bank of England’s approach is a ‘de facto low real rate (interest rate after adjusting for inflation), weaker currency policy’.
And they have a trade idea that pits the pound against the Swiss Franc…
Here’s a chart of GBPCHF:
We can see the pair has generally been trending lower, although the dip below 1.20 was brief, and prices quickly recovered and pushed into the 1.21 handle.
Goldman argues that in the era of ‘reverse currency wars’ (countries compete to strengthen, rather than weaken their currencies), the Swiss National Bank has escaped investors' gaze. Recent SNB commentary has become increasingly hawkish along with a statement that the bank is ready to respond if inflation pressures persist.
Investors are so used to a dovish SNB with their negative policy rate (-0.75%), that they have failed to recognise the shifting sands.
Aside from the Swiss domestic needs, there’s also the relative interest rate to consider. As the ECB tightens, the SNB may follow to try and maintain the relative interest rate differential to the eurozone. ECB president Lagarde all but confirmed that the ECB will hike at both the July & September policy meetings.
Goldman strategists expect GBPCHF to hit 1.18 on the SNB tightening prospect.
Price targets aside, CHF will be a very interesting currency to watch in this inflationary regime. The Swiss central bank sets monetary policy quarterly, with the next meeting on June 16th 2022. After this meeting, the next SNB decision is not until the 22nd of September, by which time the ECB may have already hiked twice.
The June meeting will be a key communication window for the SNB. Get the popcorn ready!
Not investment advice. Past performance does not guarantee or predict future performance.
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