Where To Target Sterling From Here?

[thenews]

Sterling has come under heavy selling pressure as the debate on whether to remain in or leave the EU appears to be increasingly polarised, notes Australia and New Zealand (ANZ).

"Some senior cabinet ministers, the Mayor of London and up to 150 of 330 Conservative MPs are reported to be in favour of leaving," ANZ adds.

"Political uncertainty, the UK’s current account deficit and diminished expectations of rate rises are weighing on sterling," ANZ argues.

"As the political uncertainty over “Brexit” continues and the opinion polls ebb and flow, sterling will remain vulnerable. We maintain our view that sterling will fall into a 1.35-1.40 range vs USD near term," ANZ projects.

"Whilst EUR/GBP may be expected to trade with an upward bias, political developments in the UK may also weigh on sentiment towards EUR/USD. Much of the European press has been quite negative about the agreement the EU reached with the UK. In Germany, the Frankfurter Allgemeine Zeitung argued that “if the UK leaves it could be a turning point that in the worst case could mark the beginning of the end for the European project.” In Spain, El Pais argued that if the UK leaves the EU it could inflict great danger on the European project. Despite elections this year, the US looks politically safe near term and the USD may find support as a result," ANZ adds.

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[thenews]

GBP: Brexit Fears Mostly Priced In - Nordea GBP: Brexit woes have driven the GBP far from its “fair value”. The Bank of England is currently priced to hike in 40 months – too far away from our projection of a rate hike later this year, and relative to the historical BoE/Fed pattern.

We expect the GBP to regain once the rates market is repriced, and consider Brexit fears as mostly priced in.

[thenews]

HSBC are lining up the Brexit ducks While HSBC have confirmed that they'll keep their HQ in the UK, they still have a job to do in deciphering what an exit would mean HSBC detail various outcomes for a UK exit

• Sterling could fall 15-20% against the dollar - pushing it down to 1980s levels - and

towards parity with the euro.

• This currency collapse could push inflation up by 5pp and raise import prices for firms
• Growth could be 1-1.5pp lower, roughly halving our current 2017 growth forecast of 2.3%
• Market uncertainty could be good for gilts, given their safe-haven status
• Labour supply would shrink if some existing migrants returned home or restrictions on

inflows were imposed

• Sectors with a large proportion of non-British EU workers could face higher labour costs -

notably in retail, construction, airlines and facilities management

• In construction, where skills shortages already exist, costs could spiral and limit capacity to deliver on house building and infrastructure targets
• Uncertainty could hit UK bank stocks, although they should be relatively well placed to

weather a growth slowdown.

• A reduction in passenger traffic might affect airlines and corporate structures might need to change if the UK left the single EU aviation market
• Immigration raises trend growth and is needed to help close the public sector budget deficit: lower inflows could have long-term consequences.
• Over time, Brexit could be beneficial if it allowed the UK to 'cherry pick' immigrants from all over the world and forge new trading partnerships.
• Regardless of the outcome, the UK should remain a flexible and dynamic economy - the

unknown is how economically destructive and drawn out the transition phase would be.

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[thenews]

GBP/USD: Any Signal For An Imminent Correction? - SocGen There’s no news in the UK and the “Brexit” debate is likely to dominate, getting steadily more toxic in the process.

The GBP/USD 9-day RSI, my preferred measure of whether a move is going too fast, is under 25 (warranting caution) but not as low as it was in January before GBP/USD finally bounced off 1.42. Just another way of saying that a slowdown in the pace of GBP/USD decline doesn’t (yet) signal a correction.

We remain bearish of GBP/JPY and GBP/NOK as well as the more mundane GBP/USD.

[thenews]

GBP: Down The Rabbit Hole: Where To Target? - Deutsche Bank We take a balance of payments approach to measure the ‘what if’ impact of a UK exit from the EU on sterling.

The UK’s current account deficit may improve in the wake of “Brexit.” The deficit is entirely down to the EU, with large negative balances in trade in goods and primary income. In the absence of a free trade agreement after “Brexit,” the hit to UK exports would be significant, but imports would fall further, resulting in an improvement in the trade balance.

Due to the significant hit to trade, particularly in financial services and transport equipment, a free trade agreement is likely to be negotiated. The UK may be at a disadvantage in any negotiation, as the cost to UK exports as a share of total are higher than for the EU. Under a free trade agreement, the trade balance is likely to improve less.

The large primary income deficit with the EU is due to falling profitability on the UK’s FDI investments in the EU. This structural trend is bearish for sterling, but is unlikely to change under a “Brexit.” The secondary income deficit would improve as fiscal transfers to the EU fell, but how much would depend on the outcome of renegotiation.

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