…in the long term.
Amidst an analyst note on the difficulties of measuring fiscal policy impacts on exchange rates, Goldman has weighed in on the Great British Krona. Good news, sterling: the beatings will stop. Eventually.
From the note:
The general assumption is that if the UK election does result in a hung parliament, it will become difficult to enact the required legislation to bring the fiscal deficit down…
…Between now and then, the Pound may well remain hostage to developments in the polls and the tone of the election campaign, particularly on the fiscal front…
In addition, Sterling is still plagued by lacklustre activity data and a relatively dovish central bank. We do expect both of these factors to turn more bullish for the Pound further out but in the near term they may also weigh on Sterling. Taking these three factors together, we have revised our 3-month EUR/GBP view to 0.87 from 0.84.
However, we have not changed our 6- and 12-month forecasts, which stay at 0.84.
That’s due to Goldman’s ‘above-consensus’ growth forecast for the UK, which they see as plausible due to business survey data so far. How far above consensus, and how plausible? You decide:
At present, the hard data is weaker than the survey data says it should be. This is particularly true of the GDP data; however, some of the more frequent, monthly hard data still seems to be lagging somewhat. We continue to expect the hard data to catch up with the strength of the survey data and thus look for the Bank of England to change stance and hike rates in August. Specifically, we expect the UK economy to grow by 1.8% and 3.4% in 2010 and 2011, compared with 1.4% and 2.2% from the consensus.
This underpins our more hawkish view of rates, where we expect the Bank of England to hike rates by 300bp vs market expectations of 250bp. The recent change in tone from the Riksbank and the subsequent appreciation of the SEK is a good template for the potential dynamics of the Pound.
Great British Krona, indeed. That would be the Swedish krona as a model for sterling – not the Icelandic krona. Fortunately.
Even so, Sweden is an intriguing model, to say the least. While the Riksbank has been getting ready to end ‘crisis interest rates’, the Swedish economy tipped back into recession in the meantime – throwing monetary policy up in the air.
As a coda to all of this, do bear in mind that Goldman have also recently advised on trading ideas for a sterling slump in the short term. Wily one, that vampire squid.
Oh, and what did the Goldman note conclude overall? Fiscal policy ‘dominates as a key issue’ when it comes to currency valuation. Do remember that, Westminster.
Related links:
Goldman’s sterling-slump strategy – FT Alphaville
Scylla and Charybdis, sterling edition - FT Alphaville
The Great British Peso – FT Alphaville
‘If you really want a fiscal problem, look at the UK’ – FT Alphaville
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