Märkte / Devisen 14:17 - 17.01.2017

«Pound offers a very clear buying opportunity»

Hans Redeker, Global Head of FX strategy at Morgan Stanley, favours the pound in a long-term view. And he reveals which scenario he expects for the Swiss National Bank.
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SNB
1907 gegründete Notenbank der Schweiz. Ihr Auftrag gemäss Nationalbankgesetz NBG ist, eine dem Gesamtinteresse des Landes dienliche Geldpolitik zu betreiben und insbesondere die Preisstabilität zu bewahren. Ausserdem hat sie zur Stabilität des Finanzsystems beizutragen. Die SNB versorgt den Geldmarkt und damit das Finanzsystem über Repogeschäfte mit Liquidität, gewährleistet die Bargeldversorgung, verwaltet die Währungsreserven , vertritt die Schweiz zusammen mit dem Bund im IWF sowie in der Weltbank und fungiert als Hausbank der Eidgenossenschaft. Die SNB ist als spezialgesetzliche AG organisiert und an der SIX kotiert. Die Kantone halten die Mehrheit der Aktien , die Rechte der wenigen Privataktionäre werden auch vom NBG stark beschnitten, das z. B. die Höhe der Dividende limitiert. Organe der SNB sind der elfköpfige Bankrat als eine Art VR , das für die Geldpolitik verantwortliche ausführende dreiköpfige Direktorium als Geschäftsleitung , die GV und die Revisionsstelle .

Mr. Redeker, the Pound sterling weakend prior to the long-awaited Brexit speech of Theresa May. Will it fall even further?
Yes, we haven’t seen the lowest lows. The British economy is very likely to show investment weakness. And furthermore, Theresa May plans to trigger article 50 in March. A lot of negative news will come out at that point.

Arent’t these events priced in yet?
Not in my opinion. Obvious, the currency is cheap already. Our target for the first quarter of the year is 1,17 $ per pound. But that doesn’t mean that the pound isn’t attractive.

What do you mean by that?
The pound sterling is a very clear long term buying opportunity.

Why?
First of all, I am positive on valuation reasons. If you look at the economic data, the UK has been one of the strongest economies in the G10 group last year. Nonetheless the currency has been week. That’s why we talk about a political currency in the case of the pound. It is driven by the prospect of Britain leaving the European Union.

Could you give us more details?
The pound is one of the most undervalued currencies globally. Secondly, the country is moving away from the euro. You just need more certainty about the outlook where the UK stands with its new framework. As soon as the framework is getting clearer, the pound may rally.

Last year, the Brasilian real was the big surprise in the currency market. Where do you see signs of a surprise for this year?
We have several currencies that are in a turnaround situation – like the pound sterling or even the Swedish Krona. One of the most undervalued currencies is the Mexican peso. It will stay undervalued up to the moment where you see clear what Donald Trump is going to deal. You can have a positive outlook for the peso. We don’t have a firm timetable. But as soon as you know what the result will be, it will be different. Another cheap currency is the Turkish lira but the political issues there do not allow a recovery soon.

The dollar rally has stalled in the last couple of days. Is it just a stopover, or is it going to overheat?
I think that we just see a slight correction around 2 or 3%. Nothing to worry about. In the longer run we still believe in an even stronger dollar.

For how long will the dollar strength last?
I believe that the strong dollar is going to stay with us for multiple quarters. It won’t stop before the first quarter of 2018. Maybe we will see dollar exuberance after that period of time. The dollar is able to overshoot. This may happen if the incoming administration changes its corporate tax system radically, not only reducing the headline rate from 35% to let’s say 15%, coming along with a border adjustment for imports and exports. For 2017 the USD moves may be more politically and less economically motivated should trade protectionism become a global issue.

Since Donald Trump has been elected, the dollar received an additional impulse. Is Mr. Trump the main reason for the strong dollar?
I was equally optimistic on the dollar even if there would have been no president Donald Trump. If Hillary Clinton had won the election, I would have still talked about a strong dollar. The only difference in the interpretation of a ‘Trump Dollar’ relative to a ‘Clinton Dollar’ may be the time frame required to reach the USD top. The ‘Trump Dollar’ may be the volatile version rushing to the upside quicker and topping out earlier compared to the ‘Clinton Dollar’.

Are there other factors driving the USD?
The world is not uniform. Instead it is a very diverse world. China and Asia in general have an excess capacity problem. There is too much debt which means in combination with the low return on investment suggests de-leverage. In short, the indebted and overcapacity running AXJ will generate savings which in the absence of sufficient local investment opportunity should lead to capital outflows. In this environment you should have a real impact on the exchange rate. Contrary to Asia, the United States has closed its output gap. Its investment is set to rise suggesting cost of capital going up too. This would be the case even with Clinton.

Which is your target for the dollar in the course of this year?
We expect that the dollar will reach 1,09 against the Swiss franc towards the end of the year. The dollar/euro cross will fall below parity. Our target is 0,97 by the year-end.

What could stop the dollar rally?
First of all, a strong dollar is quite abnormal. It’s atypical. The dollar is a main reserve currency. 47% of the cross border liabilities are printed in dollars. Or, in other words: A weak dollar is like oil for the engine. In most of the periods, the dollar is weak. Sometimes the dollar is getting stronger. That can last for several years. The strength of the dollar will produce current account deficits in the United States. At one point this will be difficult to fund. The result will be headwinds to the US economy. That itself could spark a reaction.

What does that mean for the euro?
The approach from the United States is very helpful to weaken the euro. Just have a look what the euro requires. The euro is designed to ensure that the weakest link in Europe is going to survive.

So why did the euro not weaken before?
Because the euro has become a typical anticyclical currency. When inflation data goes up, the euro weakens because the central bank is dovish. That means that the real yield differential matters . Last year we saw the opposite trend. The euro was strong across the crosses, it was not falling.

Why?
It was very clear. Because we had for example an exhausted German yield curve. And we got into a situation that the inflation expectations were falling rapidly. The real yields were too high for the Euro to fall. Now the environment is more reflationary. If the Trump administration implements reflationary policies, for example through fiscal stimulus, this may create an environment where you give the tools back to the ECB to weaken the exchange rate.

Could this be a threat to the Swiss franc?
I don’t think so for the time being. The Swiss national bank has had a little bit of a relief. In mid-October Switzerland could have feared that the ECB would aim to add more to their balance sheet With the reflationary situation in the USA, the upside pressure for the Swiss franc against the euro is limited. The cross will stay at 1,05 or 1,06 for a while.

As we face elections in different European countries. Is there a risk for the Swiss franc to be considered as a safe haven again?
Yes. But only, if a global economic downturn happens and the inflation expectation would decline again. Then the Swiss franc would become a destination for inflows again. Investors would regard the Swiss defense against such currency inflows as relatively weak because of the big balance sheet. But this is very unlikely, the risks are relatively small. The SNB (SNBN 1645 -0.3%) can sleep well.

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