Forex Institutional Research: Credit Agricole FX Daily
Key quotes from the Credit Agricole FX report:
GBP: How much more pounding
We remain bearish on GBP and expect a protracted period of currency underperformance as investors continue to position for the new postBrexit reality of heightened political and economic uncertainty. That said, some negatives seem to be already in the price and we suspect that the currency selloff may slow down from here. Indeed, the GBP is already looking quite undervalued according to a battery of gauges ranging from our long-term fair value model to purchasing power parity measures and short-term valuation models. The undervaluation of GBP would argue for a potential consolidation before long.
Turning to other FX drivers like the BoE outlook, we think that the MPC will try to smooth the correction in the markets rather than aggressively prop up asset prices. In doing that, it should consider the impact of its policies on GBP. We doubt that the MPC wants to trigger excessive FX depreciation that can fuel financial instability or add to the risks of stagflation. All this may argue for a more cautious and less pre-emptive policy approach and ultimately help stabilise the GBP before long.
Perhaps the biggest GBP-negative is the correction of the UK’s external imbalances. We see further FX underperformance on the back of portfolio outflows and earnings repatriation. That said, we also note that the short-term financial liabilities component of the UK’s Financial Account that has aggravated the FX selloff in 2008 is less of a problem at present. In addition, most of the recent capital inflows have been FDI and portfolio flows with greater ‘staying power’. At the margin, all this may point at less of a scope for a further panicky selloff in GBP.
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