MORGAN STANLEY: The pound is actually undervalued since the Brexit vote

LONDON — The pound is undervalued and actually represents a solid buying opportunity right now, according to forex analysts working for banking giant Morgan Stanley.

Writing in a note circulated to clients on Thursday afternoon, Morgan Stanley’s team, led by Hans W Redeker argues that sterling could actually pick up going forward, given that the political risks of Brexit have now largely been priced in by investors.¬†

This is particularly true in comparison to the eurozone, where political risks like the Dutch, French and German elections still have the potential to cause the euro to plummet.

Far-right, eurosceptic candidates like France’s Marine le Pen and the Netherlands’ Geert Wilders seemingly have a reasonable chance of gaining power in some form or another, and fears that one of the euro’s founding members could leave the single currency area, or the EU as a whole, are beginning to crystallise.

Writing in the bank’s Strategic FX Portfolio Trade Recommendations, the team says (emphasis ours):

“In an environment of carry support and market calm, we think the focus has moved away from worries after Brexit. Theresa May has set out her plans to trigger article 50 in March with enough detail that should already be priced into the market. GBP is currently undervalued and has stabilised, which we think offers a strategic opportunity to buy.”

Sterling should start to appreciate against the euro given the political climate, Morgan Stanley’s team adds, saying:

“Eurozone political risk events and related EUR bond volatility may provide incentive for these reserve managers to reallocate away from the EUR. GBP seems a good alternative as the Brexit uncertainties are baked into the price and GBP is an undervalued G10 currency.”

And here is the chart:

Opinions on the pound’s relationship with the euro differ, with UBS telling Business Insider in January that it sees pound-euro parity as a realistic possibility in the medium term.

“Our strategists are pricing in more weakness to come. Again, we’ve gone a long way, and yet the uncertainty that the Article 50 procedure is likely to bring further weakness,” UBS Investment Bank Chief European Economist Reinhard Cluse said.

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