MARKET MOVER - BNP PARIBAS - Investment Services India

This section is classified as non-objective research
Adding USD Shorts: Ease into Long GBPUSD
• The Fed’s bold policy initiative will extend
USD downside.
• We favour GBPUSD higher as UK
fundamentals improve.
• We initiate a conditional GBPUSD long
recommendation on a pullback to 1.60, target 1.67,
stop at 1.5750.
Chart 1: GBP TWI vs. UK Bank of England
Balance Sheet
The Fed’s policy action on open-ended QE has set
the trend for the USD over the coming months. We
believe USD depreciation will persist for some time.
ECB chief Mario Draghi’s strong rhetoric, pledging
support for eurozone peripheral bonds, will add
further momentum to a rally in risky assets and a
yield-seeking environment. Our favoured way to play
this trend in the FX markets is via long NZDUSD
(targeting 0.8470), but the strength of our conviction
in USD weakness encourages us to pursue further
USD shorts, with GBPUSD our next preferred
candidate.
Looking at our FX forecasts, the most upside
potential is in GBPUSD, with our forecasts for 1.67 at
end Q3 and 1.73 at year end. These forecasts are
driven largely by USD weakness on the back of
open-ended QE, but also by expectations that the
sharp run of very weak UK economic data has likely
come to an end. We believe the GBP is set to
outperform both the USD and EUR.
Our US economists believe the Fed has initiated a
bold new experiment in monetary policy that will
result in balance-sheet expansion through to at least
end 2013 and which will likely produce total balancesheet
expansion of between USD 1.2trn and USD
1.7trn. This is substantially more than QE1 or QE2.
Accordingly, the USD is set to slide, just as it did
during the previous bouts of Fed QE. We agree with
Fed Chairman Ben Bernanke that the law of
diminishing returns do not necessarily apply to
balance-sheet expansion.
In the UK, we believe the long spate of poor
economic data may be coming to an end. Three
straight quarters of GDP contraction has hurt the
GBP, but our economists believe that UK GDP will
rebound by 0.7% in Q3. Furthermore, BNP Paribas
forecasts UK GDP growth of 1.1% in 2013 and 1.7%
in 2014. As the market reassesses the recovery
prospects for the UK economy, the GBP should start
to outperform against not just the USD, but also the
EUR. Additionally, even if the BoE expands its
balance sheet further under its QE programme recent
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: GBPUSD vs. BNPP STEER
1.62
1.60
1.58
1.56
1.54
1.52
21-Jun-2012 21-Jul-2012 21-Aug-2012
Fair Value
GBPUSD
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: Overall FX Positioning
CAD
11-Sep-12
24
NOK
18-Sep-12
23
NZD
22
AUD
21
SEK
18
GBP
13
EUR
12
CHF
-11
USD
-15
JPY
-21
-50 -30 -10 10 30 50
Source: Reuters EcoWin Pro, BNP Paribas
FX Strategy / Steven Saywell 20 September 2012
Market Mover
39
www.GlobalMarkets.bnpparibas.com