Long GBP vs USD, EUR, AUD - Nomura

The research team at Nomura suggests that the three key reasons because of which they expect GBP to outperform are: 1) The inflation premium in GBP is starting to look over-stretched;  2) The Bank of England (BoE) may start to become less pessimistic if a positive global growth surprise catches the UK markets off-guard; 3) The difficulty of the early stages of the Brexit negotiations looks to be priced in already with the small drawdowns this week further proving that. 

Key Quotes

“Whether the UK will benefit from the global growth uptick or is weighed down by Brexit fears is a critical question for 2017. Markets are pricing a Brexit-induced slowdown, but we think the real risk is broader global growth feeding through to the UK.”

“Whichever way you frame it, markets are pricing a poor UK macroeconomic outturn. Real rate pricing is at an extreme compared with the UK’s peers at a time when neither current growth nor inflation expectations would support it. Moreover, the market is not pricing a single hike from the BoE over the next two years. So even if a slowdown in the UK materialises, the downside is limited if one is long sterling or short rates (looking for the BoE to be hawkish) (see UK rates – outright and cross-market view).”

“The BoE may indeed stay on hold for the duration of the Article 50 negotiations, but if it signals a more optimistic outlook owing to a repricing of global growth, markets may end up doing the tightening for it.”

“To separate our sterling view from our dollar view, we would be long sterling against a basket of currencies – USD, EUR and AUD. We expect GBP/USD to rise initially to 1.32 with a risk it finishes the year at or above 1.37. While we expect EUR to fare well with the ECB normalisation trade, we still expect GBP to hold up well vs EUR. We also see further downside risks for AUD. This is motivated by patchy economic data, the lower level of Australia-centric commodity prices, an expected moderation in the Chinese property market and a lack of a positive monetary policy impulse as the Reserve Bank of Australia (RBA) remains on the sidelines.”