ING GBP Forecast Update

8/3/2019 ING GBP Forecast Update

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GBP forecast update January 2012

1

GBP forecast update

The pound strikes back

Fig 1 INGs FX forec ast s

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

EUR/GBP 0.80 0.78 0.77 0.75 0.78 0.78 0.80 0.80

GBP/USD 1.56 1.54 1.62 1.73 1.73 1.79 1.75 1.75

EUR/USD 1.25 1.20 1.25 1.30 1.35 1.40 1.40 1.40

Source: ING

In the G10 world of free-floating exchange rates, GBP looks to be one of the cheapest

currencies compared with long-term averages. In particular, the Bank of International

Settlements (BIS) produces a series of Real Effective Exchange Rates (REER), which

show how currencies are trading relative to a whole host of trading partners not just in

nominal terms, but adjusted for relative inflation rates. On this basis, GBP is 13% below

its long-term average. While such a deviation could have been justified in the aftermath of

the global financial crisis, the question is whether such a valuation can be justified in

2012 especially when the UKs largest trading partner, the Eurozone, has some unique

challenges. We think not.

Fig 2 Ad justed fo r in f la t ion , GBP remains one o f the cheapest cur renc ies

-15

-10

-5

0

5

10

15

20

25

30

Mexico

UK

SKorea

US

Hungary

SAfrica

Eurozone

Turkey

Sweden

India

Malaysia

Norway

NZ

Thailand

Japan

Canada

Indonesia

Singapore

Switzerland

China

Russia

Australia

Brazil

Percent of BIS REER index above/below 10-year average

Source: BIS, ING

Lets start by looking at the activity story.

The global financial crisis hit the UK economy harder and earlier than it did the Eurozone.

UK growth had already stalled at the start of 2008 and the 7% peak-to-trough contraction

in output saw GBP under pressure from late 2007 onwards. EUR/GBP trading below

0.70, as it was at the time, seems a distant memory.

Clearly the performance of the Eurozone and the resolution to the government debt crisis

are going to have a major bearing on UK activity. Yet business confidence in the UK is so

far defying the collapse in Eurozone confidence. We forecast the UK to outperform the

Eurozone this year and next. Helping the UK in the second half of this year will be

continued monetary stimulus from the BoE, a credit-easing policy to help SMEs and in

particular a sharp fall in headline-inflation-boosting real wages and spending.

FINANCIAL MARKETS RESEARCH

research.ing.com SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION

FX6 January 2012

Chris TurnerHead of FX Strategy

London +44 20 7767 1610

[email protected] KnightleySenior Economist

London +44 20 7767 6614

[email protected]


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Of course, the Eurozone outlook is uncertain, but at present we forecast a 0.4%

contraction in 2012 output compared with an expansion of 0.3% in the UK. Equity

investors seem to take a similar view, with recent fund manager surveys suggesting

investors were increasing their large Eurozone underweight positions in late 2011, while

keeping their modest underweight UK positions relatively stable.

Fig 3 UK and Eurozone com posi te PMIs d iverge F ig 4 We fo recast the UK to ou tper fo rm Eurozone

36

38

40

42

44

46

48

50

52

54

56

58

60

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

UK Eurozone

-12

-10

-8

-6

-4

-2

0

2

4

6

07 08 09 10 11 12 13

UK Eurozone

Forecasts

(QoQ% annualised)

Source: EcoWin, ING. UK PMI weighted services (78%), manufacturing(15%), construction (7%).

Source: ING

In terms of monetary policy, the BoE may choose to expand its Asset Purchase Plan.

However, the ECB looks as though it will have to be part of the solution to the Eurozone

debt crisis, ensuring liquidity is abundant. If not, the risk of Eurozone government defaults

rises markedly and soaring risk premia should send the EUR lower anyway. In short, it is

hard to see the ECB vs. BoE monetary policy trade-off being a key influence on

EUR/GBP, with rates already at rock bottom.

For investors, the choice to hold a particular currency is a function of safety, liquidity and

return. Certainly the former two objectives have dominated decision-making over the

previous two years and will probably play an important role this year as well.

We have written frequently1

on the subject of currency preferences of FX reserve

managers and we believe GBP will score well with this community this year.

Fig 5 GBP remains one o f the top 4 reserve cho ices F ig 6 F ive-year sovere ign CDS: UK re la t ive ly be t te r

-10

10

30

50

70

90

FX Liquidity

LT

Debt

Rating

JPY

EUR

USD

GBP

AAAAA+AAAA-A+

0

50

100

150

200

250

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12

UK US Germany

France Netherlands Finland

Source: ING, size of bubble represents depth of liquidity in debt markets. Source: EcoWin

1See eg, FX Reserve Management: Re-assessing Safety, Liquidity and Return, 11 February 2011

We forecast a 0.4%

contraction in 2012 Eurozone

output compared with an

expansion of 0.3% in the UK

It is hard to see the ECB vs.

BoE monetary policy trade-

off being a key influence on

EUR/GBP, with rates already

at rock bottom


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The depth of the GBP sovereign debt market remains attractive, especially compared

with some of the new reserve currencies, the Canadian and Australian dollars. And with

core Eurozone debt coming under pressure over recent months, and even German CDS

trading wider than the UKs, we expect fund managers to be reducing outright Euro debt

exposure as opposed to migrating from the Eurozone periphery to the core, which was

seen during the early stages of the Eurozone crisis.

Data from UK authorities indeed show that foreigners have been happy to increase their

exposure to UK gilts over recent quarters, providing a vote a confidence to the fiscal

austerity undertaken by the government in 2010.

In all we do not see 2012 conditions justifying GBP this week, especially against the

EUR. Recent losses in EUR/GBP, we believe, are part of a 12- to 18-month trend to carry

EUR/GBP to 0.75, slightly below some long-term fair-value estimates for EUR/GBP at

0.80.

Fig 7 Fore ign ow nersh ip o f g i l t s acc e le ra tes F ig 8 EUR/GBP se t to b reak low er

0

200

400

600

800

1000

1200

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Overseas BoE Non-BoE domestic

(bn)

0.70

0.75

0.80

0.85

0.90

0.95

1.00

08 09 10 11 12 13

0.70

0.75

0.80

0.85

0.90

0.95

1.00

ING Forwards

Source: UK DMO, BoE Source: EcoWin, ING

The depth of the GBP

sovereign debt market

remains attractive, especially

compared with some of the

new reserve currencies of

Canada and Australia

Recent losses in EUR/GBP

we believe are part of a 12- to

18-month trend to carry

EUR/GBP to 0.75


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Disclosures AppendixANALY ST CERTIFICATION

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indirectly related to the inclusion of specific recommendations or views in this report.

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ING GBP Forecast Update