‘Don’t bank on rally for sterling’

Don’t bank on a sustained rally for sterling if the UK votes to remain in the EU.

That’s the view of an increasing number of strategists and investors who point to other reasons for the UK currency to stay weak, including the UK’s record current-account deficit and speculation interest rates will stay low for the foreseeable future.

The pound has already fallen more than 3% against the dollar this year amid doubts about Britain’s membership of the world’s largest single market. 

Pioneer Investments, which predicted sterling’s slide in the second half of 2015, and Julius Baer Group, the second most-accurate currency forecaster, see a bounce of no more than 4% after a “remain” vote on June 23, and for any gains to quickly evaporate.

“If the referendum says we stay in the EU, then we think the reward for the pound, or the support for the pound, will be very muted,” said David Kohl, the head of foreign-exchange research at Julius Baer in Frankfurt. 

“A week after the referendum, it will be quickly forgotten as you maintain the status quo. The downside is very high,” he said. Mr Kohl sees sterling rallying by up to 3% after a vote to remain, followed by a drop to $1.36 within a week. It will end the year at $1.37, he forecasts, down almost 4% from its level of $1.4222 yesterday.

With opinion polls showing as many as one in three people undecided about how to vote in the referendum, the pound’s value is on a knife edge. Sterling has even become a campaign weapon, with pro-Europeans citing a potential crash in the exchange rate in their campaign literature.

A decision to leave the EU would lead to “a short-term disaster and long-term damage” for the pound, Manuel Andersch, a Munich-based strategist at Bayerische Landesbank, has said.

Options prices suggest traders are more pessimistic about sterling than any of its Group-of-10 peers — not just in the wake of the June referendum, but over the next year. 

“On a Brexit announcement, a 20% move by the pound is very achievable,” said Paul Lambert, the London-based head of currencies at Insight Investment Management. A vote to remain in the EU would bring forward expectations of a currency-boosting rate increase, but only to the first quarter of 2018.

The UK economy and its currency face other challenges. Britain’s current-account deficit widened to 7% of GDP in the fourth quarter, which may dent sterling’s traditional appeal. The IMF has cut its UK growth forecast, warning of “severe” damage if it left the EU.

* Bloomberg


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