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What's Marshal Foch got to do with the value of Sterling ?

March 8, 2017

 

 What's Marshal Foch got to do with the value of Sterling ?

 

ref :- "Morgan Stanley sees brighter outlook for sterling, UK midcaps" , Reuters 7/3/17

 

Call it what you will : countertrend, contratrend, contrarian ? Anyway, whichever you prefer some of the most spectacular market coups have been pulled off by those prepared to buck the prevailing wisdom of the time and put on positions in the market that seem to defy conventional logic. 

 

Of course, such plans often backfire and timing is everything but you can't help admiring the guts required even if you can't always agree with the rationale. Whilst you could easily compare such a trading strategy with standing in front of runaway trains, or perhaps the actions of King Canute (he was misunderstood, by the way), being charitable types we are reminded of the words of Marshal Foch at the first Battle of the Marne in 1914, a much more successful example of a plan of action that contradicts obvious reason.

 

"Mon centre cede, ma droite recule, situation excellente, j'attaque !", or  "My centre is giving way, my right is retreating, situation excellent, I am attacking !"

 

Bravo ! .... but enough of all that. The point is that despite the British Pound looking truly sick, and with other major institutions queuing up to re-state their bearish outlook for sterling, Morgan Stanley yesterday re-asserted their positive view for the currency. In a report revolving around the beneficial effects of a strong pound on midcap stocks (as opposed to large-cap stocks, which would suffer), the firm called once again for GBP / USD to rally to $1.2800 by year-end, and $1.4500 by the end of 2018.

 

Now, in the current environment with GBP / USD breaking down through $1.2200 and GBP / EUR falling towards €1.1500, you've got to say that's brave. The technical picture looks pretty dire for sterling, and at face value the fundamentals don't look too hot either. Amongst other things :

 

  • Not only might the UK government have to cope with another referendum on Scottish independence, but big gains for Sinn Fein in recent elections raises the possibility of a vote on Northern Ireland's future too.

  • Repeated rejections of the UK government's Brexit bill in the House of Lords, and their suggested amendments to it, undermine confidence in the government and and its bargaining position.

  • Brexit might slow Britain's growth in GDP and keep interest rates lower for longer.

  • Ropey retail sales numbers released yesterday represent the first evidence of falling consumer confidence, which had previously held up so well.

 

Mmm ..... you can see why weaker sterling is the majority view. But as ever there's another way of looking at things :

 

  • GDP growth forecasts, marked down to 1.4% post-referendum, are being adjusted higher to 2.0% after surprising resilience

  • Stronger growth, and the inflationary effects of already much weaker sterling, puts upward pressure on interest rates.

  • Unexpectedly high tax receipts boost the governments coffers.

  • As Bank of America have pointed out, due to the UK's large current account deficit, sterling is a "global" traded currency. Expected faster global growth will benefit sterling.

 

In their February report, B of A were also of the opinion that, like it or loathe it, PM Theresa May has a Brexit plan and though there will undoubtedly be difficulties they ultimately will be overcome even if some pain is involved. More than anything,

 

there is a feeling that there will come a time when the market ceases to panic every time there is a Brexit-related headline. Wouldn't that be nice ?

 

Even sterling bulls are aware of the dangers, and it's quite possible that the reality turns out to be a combination of both views .... i.e. sterling goes lower before rallying in the second half of the year.

 

Seems as plausible a forecast as any ..... want to be put some numbers on it ?

 

Er .... not really, so we'll leave that to the B of A report as well : DOWN to $1.15ish , then UP to $1.35 is their call.

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