Deutsche Bank is backing the pound to slump even more in the coming weeks, pushing the UK’s currency even further into record lows .
In the bank’s weekly equity strategy note, titled this week “Don’t exit the Brexit trades” — Deutsche’s strategists Wolf von Rotberg, Sebastian Raedler, Tom Pearce, and Andreas Bruckner argue that despite crashing almost every day for the last two weeks, sterling actually still remains substantially overvalued, pointing to even more drops in the pound’s value.
Von Rotberg et al acknowledge that sterling could get a boost in the very short term — as Wednesday’s rally, which has seen the pound jump more than 1.3% so far on the day, suggests — but say that the pound’s current overvaluation means the only way is down. Here’s the key extract from DB (emphasis ours):
“A short-term GBP rebound, given that a) positioning is extreme (with net sterling short positioning is at record highs), b) price momentum is already very negative (with sterling suffering the 3rd largest 6-month sell-off since 1990) and c) GBP/USD has already undershot market-implied forward policy rates. However, while a near-term reversal is possible, we ultimately expect deteriorating fundamentals to drive the currency lower (our FX strategists think the GBP TWI [trade weighted index] is still 8% overvalued even after the recent sell-off). This points to further upside for our Brexit trades.”
Deutsche provides four key reasons for this analysis, along with charts to prove their point. Check them out below:
- “UK PMIs continue to point to a GDP growth slowdown despite the resilience in the post-referendum UK macro data.”
- “Macro surprises are currently at an all-time high and set to roll over, removing sterling support.”
- “The current account deficit, at 7% of GDP, is the highest among developed markets.”
- “Political uncertainty is set to remain high, given the lack of clarity about the post-Brexit relationship with the EU.”
Here are three of Deutsche key charts, providing the backing for its belief that the pound is merely on the edge of another massive drop:
Essentially, sterling has already fallen off a cliff, only to land on top of another cliff that it is also going to fall off. Like this:
While this is obviously pretty bad news for the UK in general — and not just for people wanting to go on holiday any time soon — there is money to be made from the UK’s growing financial market doom.
In the same note, Deutsche reiterates its positions on its so-called “Brexit trades,” saying that it backs the FTSE 100 — which hit an all-time high on Tuesday — to keep rallying, outperforming the FTSE 250 and the Stoxx 600 European index, two of the bank’s key trades right now.
Things may already look bleak for sterling, but the message is clear. Expect it to get worse before it gets better.