Goldman: Pound Too Expensive

Goldman Sachs Group Inc. is doubling down on its call that the pound has further room to depreciate.

While some analysts’ currency-valuation models show sterling looks cheap after hitting record lows, examining the pound from a perspective that incorporates Brexit’s impact on trade and the wider economy paints a different picture, Goldman argued in a note published last week. On that basis, sterling is still overvalued by as much as 10 percent, according to Goldman analysts Robin Brooks, Silvia Ardagna and Michael Cahill.

In research dated Oct. 25, the trio expand on their theory, arguing that the shocks of the U.K.’s decision to leave the European Union on the country’s current-account deficit — or the shortfall between money going out of the U.K. and money coming in — are a game changer in analyzing just where the pound will go.

“The signal that sterling is cheap ignores the ructions that Brexit may cause for the U.K. economy and — potentially — a drop in fair value,” the analysts write in their Oct. 25 note. “As a result, we use a different approach, which calculates the depreciation needed to bring the current account to a new, post-Brexit equilibrium.”

Sterling depreciation through October has probably taken the U.K.’s underlying current-account deficit from just over 6 percent to about 3.3 percent of GDP, they argue. Assuming a target shortfall of 1.5 percent as sterling depreciates and helps boost exports, they concluded that fair value for the pound lies somewhere 20 to 40 percent lower than its pre-Brexit levels.

Bloomberg

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell