1.70 sterling target finally achieved

My recommendation in successive columns to own the British pound since early 2013, when cable (sterling/dollar) traded at 1.52-1.54 has been vindicated with a vengeance. Cable is now at 1.6965 as I write. Sterling’s spectacular rise was inevitable as the British economic data accelerated, the Bank of England turned increasingly hawkish as the sceptered isle is the most inflation prone economy in Western Europe, British companies (AstraZeneca) became targets of takeover bids, and the “wealth effect” from the housing bubble in London and the Home Counties boosted a High Street spending binge. Sterling has always punched above its weight among global currencies, due to its role in the prewar imperial tarrifs preference regime, North Sea oil and City of London’s role as the global safe haven for Russian, Arab, West African and even South-east Asian flight capital. While I was fixated on the Brazil-Croatia cross rate (long samba, as usual!) for obvious reasons, sterling is now my current macro obsession de jour.

Governor Carney’s bombshell Mansion House speech means that sterling will now easily reach my 1.70-1.72 target as money markets price in a winter base rate hike. New Zealand’s Reserve Bank has, after all, crossed the rate hike Rubicon last week. Despite the events in Iraq, the US dollar was hit by the mediocre retail sales data, amplifying Carney’s sterling pop. When George Osborne wears a lounge suit while warning about financial stability, the IMF warns Britain about a housing bubble and Scotland votes to reverse the verdict of the Battle of Culloden Moor, I am nervous about sterling’s risk-reward calculus. If Carney and Osborne target the UK home mortgage market with loan-to-market value caps at a time when oil prices go ballistic, the Old Lady of Threadneedle Street is now on tight money alert. Let us get real. David Cameron will call a general election next year. This means if Carney and the MPC move, they do it by November. Sterling remains my favourite G-8 currency for now.

It is ironic that Carney’s hawkish speech came the week after Mario Draghi’s ECB slashed its bank financing rate. As a student of monetary economics and credit cycles since I first read von Hayek and Friedman/Schwarz in my early 20s, I have learnt the hard way that central bank easing cycles are synchronised while tightening cycles are not. This gives currency traders a licence to make money as financial markets price the timing and magnitude of divergent monetary policies. This is my definition of global macro, my own modest quest to continually expand the frontiers of my own ignorance. I recommend reshorting the euro at 1.3535 for a 1.28 year-end target. Reserve managers will never dare buy the euro as long as Dottore Draghi’s “I am not finished yet” sword of Damocles haunts the EU’s single currency. Now that Spanish Bonos yield less than the Uncle Sam 10-year note, the very notion of a peripheral “carry trade” is laughable. The Bundesbank’s hard money, Weimar obsessed zealots will be forced to buy into Draghi’s “whatever it takes” world view.

An Iraqi oil shock reinforces the deflation risk threat for both Club Med and core Europe. The prospect of Marine Le Pen in the Elysee Palace, no matter how remote, turns France into Berlin’s enemy, not ally in the EU. No tank battles in the Ardennes or Alsace Lorraine but an unquestionably higher political risk premium on the euro.

Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae