The British pound has lost ground in the recent global rout. Can it rebound? And against the former safe-haven yen? Here is the view from Nomura:
Here is their view, courtesy of eFXnews:
The UK short-term growth outlook is now clearly less pessimistic than the market feared one or two months ago: UK Q4 GDP growth is now tracking 0.5% q-o-q from 0.0% q-o-q in early August. The August PMIs, having posted record declines in July, rebounded to above pre-Brexit levels in August. Hard data (retail sales, house prices) have also remained robust since the Brexit vote. This has cast doubts on the BoE implementing another cut at November’s meeting.
The market still prices 6bp of a cut for the November meeting and a peak of 11bp by September next year. We think it is too early to argue that the UK will grow much stronger than the rest of the EU next year, as clearly there is much uncertainty around how Brexit negotiations will play out. However, we view that there is a trade-able window of opportunity for the UK to outperform nominal GDP expectations on an absolute and relative basis, which could see expectations of Bank of England easing reduced further. This in turn should support GBP in Q4.
Other factors that can boost GBP include the possible announcement of fiscal stimulus into the Autumn Statement. A supportive package could further relieve pressure on the BoE to act and support confidence ahead. In addition, positioning is still skewed heavily to short GBP, which makes the currency prone to rally on short squeezes, especially if UK data stay healthy. Clearly, medium-term downside risks to GBP remain. We believe that “Brexit means Brexit” and the UK will leave the EU. Therefore, long positions must be closely monitored against the Brexit negotiation backdrop. However, Article 50 is not expected to be triggered until H1 2017, leaving a period when other factors can be more supportive of GBP.
We like to trade GBP strength against CHF to avoid USD appreciation risk. EUR/GBP shorts can also be attractive, but we are sceptical of the ECB’s ability to surprise the market in Q4. Meanwhile, we expect the SNB to remain dovish, and CHF’s attractiveness as a funding currency to provide gradual CHF depreciation into year-end. Even if the ECB decides on more aggressive easing, the SNB’s strong commitment to avoid CHF appreciation suggests a high possibility of CHF selling intervention and GBP/CHF is likely to perform well. In contrast, if risk sentiment stays strong without aggressive ECB easing, carry funding attractiveness will weaken CHF. Thus, GBP long against CHF will be more attractive than against EUR.
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