Forex Flash: GBP faces conflicting valuations – RBS

Share | (Barcelona) - According FX Trading Specialist Paul Robson at RBS, "consistent with our suite of short-term fair-value models, the EUR/GBP is too cheap while GBP TWI and GBP/USD are too expensive. A consistent theme is a loosening correlation with interest rate spreads." Over the past 3 months, yields have had little correlation with GBP at a time when interest rate spreads have been moving against it.

Moreover, "Correlations with equities have remained tight - the GBP is often shown to outperform the USD and JPY, and underperform most other currencies when equities rise. The GBP/USD gains have thus been consistent with the rise in global equity markets." Robson adds. At the same time, the expansion of the BoE's balance sheet relative to the Fed's has not had the negative impact on GBP vs. the USD that it has done in recent years.

The reasons for the breakdown are hard to pin down exactly; it may be that M&A flows have been GBP supportive, or perhaps it relates to UK banks deleveraging abroad. UK banks certainly appear to have deleveraged more quickly than most. The latest data from the Bank of International Settlements ( BIS ) also suggest that GBP may have benefitted from deposit flight from the Euro area. Euro area banks have been trading more solidly of late and this is something, which may suggest that such flows may be about to reverse.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Forex and Currencies

Referenced Stocks: BIS

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