Foreign exchange strategists at Credit Agricole reckon a punt on the British Pound could be one of the better bets to be had this week.
The call is made on the basis of the Pound coming out on top of its other main G10 competitors when analysed on six different criteria.
Each G10 currency is assessed on the following criteria:
- FX carry - is it possible to earn return on money markets in a given jurisdiction
- Yield momentum - is the yield offered in a certain jurisdiction heading in a profitable direction, if the answer is yes then that currency could stand to benefit.
- Data surprises - if data is beating expectations the currency is likely to benefit
- Risk-on/Risk-off - how sensitive is a currency to positive vs negative market conditions.
- Positioning - has the market over-committed to a bet? If so, then further moves in that bet’s direction become increasingly hard to achieve. Consider that markets remain overwhelmingly of the opinion that the Pound will fall further. This is a crowded trade and therefore and reversals could be big.
- Composite ranking - this is Credit Suisse’s in-house assessment based on the above.
And when the above scores are tallied, we see Sterling comes out on top:
Credit Agricole’s G10 FX Scorecard shows a strong buy signal for GBP and a strong sell signal for the US Dollar.
“The model this week indicates long GBP, NZD, CHF and weak long EUR vs short USD, CAD, AUD and weak short SEK positions (see chart below). Risk on/risk off is still the most attractive trading strategy, but now followed by positioning,” says Credit Agricole’s FX Strategist Jennifer Hu.
Hu points out the model was down 0.90% last week.
“Most of the losses were from the long AUD and short JPY positions; however, these were partly offset by gains in the long GBP position,” says Hu.
Trade performance (total return) assumes hypothetical trades are entered at London close on Friday and are held for one week until the following Friday close.
Barclays Backing the Pound
Another big-name arguing in favour of Sterling are UK high-street lenders Barclays.
Analysts at the bank have come out as one of the most prominent institutions who believe Sterling is due a rise.
"In terms of forecasts, our greatest conviction lies in the pound. We expect the triggering of Article 50 to initiate a rebound in GBP from historical undervaluation as ambiguity over Brexit recedes," say Barclays in a client briefin.
Analysts argue markets have overestimated the downside to GBP, but a confluence of factors – positioning, corporate hedging, risks to monetary policy (some noted in the Credit Agricole argument above) should accelerate the rebound.
In Q1 17, Barclays expect EURGBP to reach 0.76 and GBPUSD to reach 1.38.