RBS: Sell sterling as a top trade for 2013

18 Dec 2012 | 08:05
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Currency compass

RBS currency analysts have said selling sterling against the US dollar represents a "top 2013 trade" as the pound rises to a ten-week high.

The bank's FX team are concerned sterling's relative safe haven status could come under threat next year, as deteriorating public finances and productivity performance and falling credit ratings hit home.

The recommendation, made on 14 December, came ahead of the pound rising to $1.6216 against the dollar yesterday, its highest level since early October.

Further quantitative easing in the US has boosted the GBP/USD exchange rate in recent weeks, even as BoE governor Mervyn King repeats concerns over sterling's strength.

RBS has put a $1.5050 target on the sterling/US dollar rate, a fall of more than 7% from the levels reached yesterday.

With the UK's AAA rating under increased scrutiny, having been placed on 'negative watch' by Standard & Poor's last week, RBS strategist Paul Robson suggested the UK may struggle to shrug off a downgrade in the manner seen when the US and France lost their own triple-A ratings.

"A ratings move may see investors question the UK’s 'relative' safe haven status and could influence sovereign wealth funds and FX reserve management flows that have sought out AAA assets," Robson and team said.

Fiscal position

Of the issues facing the UK next year, RBS points to the continued deterioration of the UK's current account position, as marked by a collapse in the income balance seen over the past four quarters.

Concerns over the trade deficit may also mean a negative re-rating for sterling, the team said.

"There has been little sign that the trade deficit (in goods) is narrowing. The poor performance is holding back investment, employment and the rebalancing of trade and the public finances."

RBS also pinpoints what appears to be "a permanent loss of output" in sectors such as financial services and extraction.

"Sterling’s long-term equilibrium may be somewhat lower than current levels as a consequence. A fall in the nominal exchange rate is likely. "

The team added "a greater part of the budget deficit looks structural rather than cyclical," given fiscal consolidation is now expected to take longer to achieve.

Other currencies

While RBS expects the Bank of England will be forced into further easing action sooner than many expect, it is more sanguine about the pound's prospects against the euro and the yen.

On the former, Robson said the potential for capital flight from Europe, in the event of a resurgence of the sovereign debt crisis, means the team expects further EUR/GBP underperformanc next year.

Japan's change of government, meanwhile, means a weaker domestic currency is likely to be "at the heart of [Japanese] policy", in contrast with the attitudes of policymakers in the UK.

Categories: Economics / Markets

Topics: SterlingDollarBank of england

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