Outlook Less Rosy for Pound Sterling than for Euro and Swiss Franc

“Within Europe, it’s less clear that GBP will outperform and as a result we believe short GBP/CHF is attractive from a relative central bank perspective” – Nomura 

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The Pound has turned a corner against the Dollar but is still likely to underperform the Swiss Franc and Euro as one year turns to another, according to strategists at Nomura, who’ve recently booked profits on a bet against GBP/USD but now advocate that clients bet on further losses for GBP/CHF.

Sterling has fallen against a vast majority of comparable currencies this year with double-digit percentage losses against some but there are few analysts out there who were as well timed and profitable in their wagers against it as the strategy team at Nomura when tipping GBP/USD as a sell in February.

Nomura billed the Pound to Dollar rate as a short when it was trading around 1.3460 and just hours after Russian armed forces crossed over into Ukraine and booked an 11.6% profit when closing the trade in the middle of this month following a steep early November correction lower in Dollar exchange rates.

“It’s quite possible that along with other European currencies, GBP may rebound into year-end if global growth prospects show signs of continued improvement (bounces in PMIs thanks to warm weather, lower energy prices?),” writes Jordan Rochester, a G10 FX strategist at Nomura, in a Tuesday note.

“However, within Europe, it’s less clear that GBP will outperform and as a result we believe short GBP/CHF is attractive from a relative central bank perspective,” he adds.

Above: Pound to Dollar exchange rate shown at daily intervals. Click image for closer inspection.

Rochester cited signs of a change in China’s approach toward coronavirus containment and widespread as well as deeply ingrained expectations of a sharp global economic slowdown being ahead last week when advocating that clients bet on a robust rebound in EUR/USD over the coming months. 

The view is that the Euro-Dollar rate could rally to 1.08 by middle of next month and 1.10 in the early weeks of the new year if financial markets begin to take an optimistic view about the economic outlook for the mid or later stages of 2023, though the same level of optimism doesn’t extend to Sterling. 

“We wrote a few weeks ago on how substantially higher energy prices in Europe vs the US are weighing on the euro area’s manufacturing trade surplus. For the UK it’s a similar story but from a much weaker starting point,” Rochester says.

“The UK doesn’t have a manufacturing trade surplus and if anything it is in a deficit that will keep getting wider with UK energy prices also 4-5x higher than that of the US. If we extract oil and erratics from the UK’s goods balance it continues to fall further into deficit,” he explains. 

An adverse “financial flows” environment for Sterling is a key reason why it’s expected to underperform against the Euro in the months ahead though the relative central bank policy picture is viewed as more important because of its influence on bond yields.

Above: GBP/CHF shown at daily intervals alongside GBP/EUR. Click image for closer inspection. To better time your payment requirements, consider setting a free FX rate alert here.

Yields are significance drivers of market appetite for the Pound but when it comes to the interest rate outlook Rochester sees the Swiss Franc having an advantage against Sterling and more so than the Euro due to the Swiss National Bank’s added support for the currency.  

“If you quickly examined FX reserves you would find them falling and sight deposits too, and as a result you would be forgiven for thinking this is FX intervention (CHF buying). But it’s probably not large scale,” he writes.

“We think it is unlikely that we’ll see the SNB dovish pivot into year-end. But for the BoE the conversation is quite different,” he adds.

Market-implied measures of expectations suggest investors are anticipating around a 0.9% increase in the SNB cash rate next year but Rochester and the Nomura team see scope for the bank to lift borrowing costs further than that and are also comforted by the SNB’s foreign exchange policy.

This has seen the SNB forewarning multiple times that it would be prepared to sell some of its large foreign currency reserves in order to prevent the Swiss Franc from depreciation while also being canded about the bank’s preference for continue raising interest rates.

The SNB’s stance contrasts with that of a more cautious Bank of England (BoE) and is part of why Nomura sees GBP/CHF slipping to 1.0555 by early January.