The pound had a surprisingly strong run in 2017, and there are no signs the British currency is going to give up its rally in 2018.
That’s the message from Alan Higgins, the contrarian chief investment officer at Coutts & Co. in London — the bank famed for having Queen Elizabeth II among its clients. Higgins said he is staying positive on sterling
this year, even as Brexit talks continue to rumble along in the background.
“We expect the U.K. to get a Brexit transition deal and therefore more confidence for U.K. corporations and overseas corporations [looking to invest in the U.K.],” he said.
“Also, the global economy is performing well, but the U.K. economy is underperforming. This U.K. underperformance could reverse itself when there’s somewhat more confidence in the country’s economy,” he said.
The U.K. and the European Union in December reached an agreement on three key Brexit issues — citizens’ rights after the divorce, the Irish border and the exit bill — paving the way for negotiations to move onto the all-important trade deal. But with the Brexit deadline of March 2019 looming, Coutts is increasingly confident Brussels and London will agree to a transition period, which will allow more time to discuss the complex trade details.
“The corporate sector has been risk averse in respect to investments. Which is understandable — you see that cliff edge of March 2019 and worry ‘do we need to prepare for a no deal’. We really think a transition is underemphasized in importance,” Higgins said.
“For sterling that’s the next big catalyst,” he added.
Just a year ago, traders were dumping the British currency in bucket-loads, spooked by the uncertainty created by the country’s June 2016 vote to leave the EU. In January 2017, sterling dropped to $1.2046, a more-than-30-year low against the greenback.
The embattled pound encouraged Higgins to start snapping up sterling, arguing that is was cheap and eventually would return to its former glory. The move was highly contrarian at the time, with most currency strategists expecting sterling to head even lower and possibly reach parity with the euro and dollar.
Since Higgins’s call in early 2017, the pound has rebounded about 15% to trade above $1.38, which is its highest level since the Brexit vote in June 2016. While most 2018 forecasts now point to a pound pullback — Morgan Stanley for example sees it falling to $1.24 by year-end — Higgins isn’t yet tempted to take profit on his sterling trade. He expects the pound to continue higher to $1.40 in 2018.
The biggest sterling win, however, is likely to be against the euro
he said. The shared currency has rallied recently after hawkish noises from the European Central Bank sparked speculation the bank’s ultra-accommodative easing program could come to en an end in 2018. This week, the euro
soared to a three-year high against the dollar and to around its strongest pound level since November.
“We think the euro has overshot somewhat and is peaking out at these levels. The good news in terms of the euro economy is in the price, and therefore what you tend to see in a scenario where euro-dollar dips, is a scenario where cable is quite steady, and therefore sterling-euro outperforms on the cross,” he explained.
Cable refers to the pound-dollar pair. Against the eurozone currency, Higgins expects the pound to climb to €1.20 this year, a 6% jump from the current level of €1.13.
“Moving back to €1.20 would still leave sterling undervalued,” he said. “When you buy something that’s undervalued, which we think sterling is, nice things tend to happen. It takes time and it doesn’t always happen immediately, but nice things do tend to happen.”