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6 May 2015
EUR/GBP remains a buy into UK elections – JPM
FXStreet (Barcelona) - Paul Meggyesi, FX and rates strategist at JP Morgan, notes that the risk-reward favours entering into a long EUR/GBP position.
Key Quotes
“We are still not convinced that investors will unreservedly welcome a Labour minority government (the single-most likely scenario according to bookmakers) simply on the basis that fiscal policy will be loosened by an unspecified amount, as the growth benefits of looser policy still need to be weighed against the possible adverse consequences for growth and capital inflows of Labour’s various taxation measures.”
“There is also the highly uncertain issue of the extent to which a minority Labour government would be reliant upon the support of SNP, and the price of such support (Labour leader Miliband is increasingly defensive on this issue and went further than ever in last night’s Question Time in rejecting a deal with the SNP).”
“Moreover, we also question a viewpoint we have heard from some investors that political uncertainty can be quickly resolved following the election – it would be if Labour enjoyed a plurality of seats in parliament; it could be quite protracted if, by contrast, the Conservatives are the single largest party and are tempted to chance their arm as a minority government (in which case the nature of the Labour-SNP relationship would prove decisive).”
“A glance at sterling’s high-frequency fair-value models indicates a complete absence of a political risk premium, which simply feels wrong to us in view of the above arguments (the sterling index is, in fact, 4-4.5% overvalued compared to 5Y rate differentials that should also capture some of the additional impact of ECB QE). By itself that would not be enough to motivate another stab at selling sterling, but with the euro now in outright recovery mode and this weeks macro-data asking more challenging questions about the UK recovery we believe the risk/reward favours re-entering a long EUR/GBP position.”
“Our preference is to do so in cash given the riskpremium which is priced into GBP vols for next week. As such we buy EUR/GBP at 0.7355 with a fairly loose stop at 0.7170.”
“Buy EUR/GBP at 0.7355, stop at 0.7170.”
Key Quotes
“We are still not convinced that investors will unreservedly welcome a Labour minority government (the single-most likely scenario according to bookmakers) simply on the basis that fiscal policy will be loosened by an unspecified amount, as the growth benefits of looser policy still need to be weighed against the possible adverse consequences for growth and capital inflows of Labour’s various taxation measures.”
“There is also the highly uncertain issue of the extent to which a minority Labour government would be reliant upon the support of SNP, and the price of such support (Labour leader Miliband is increasingly defensive on this issue and went further than ever in last night’s Question Time in rejecting a deal with the SNP).”
“Moreover, we also question a viewpoint we have heard from some investors that political uncertainty can be quickly resolved following the election – it would be if Labour enjoyed a plurality of seats in parliament; it could be quite protracted if, by contrast, the Conservatives are the single largest party and are tempted to chance their arm as a minority government (in which case the nature of the Labour-SNP relationship would prove decisive).”
“A glance at sterling’s high-frequency fair-value models indicates a complete absence of a political risk premium, which simply feels wrong to us in view of the above arguments (the sterling index is, in fact, 4-4.5% overvalued compared to 5Y rate differentials that should also capture some of the additional impact of ECB QE). By itself that would not be enough to motivate another stab at selling sterling, but with the euro now in outright recovery mode and this weeks macro-data asking more challenging questions about the UK recovery we believe the risk/reward favours re-entering a long EUR/GBP position.”
“Our preference is to do so in cash given the riskpremium which is priced into GBP vols for next week. As such we buy EUR/GBP at 0.7355 with a fairly loose stop at 0.7170.”
“Buy EUR/GBP at 0.7355, stop at 0.7170.”