BMI Currency Views Update: Weaker UK Pound, Stronger Brazilian Real

Although we have been targeting the US$1.55-1.65/GBP range for a while now, we caution that the outlook for the British pound is now fundamentally changing for the worse (i.e., weakness). Indeed, we are more concerned about sterling than at any other point over the last three years. Despite the woeful economic fundamentals post-crisis, the pound has hitherto been buttressed by the credibility of the British government’s fiscal reform programme as well as the escalation in the eurozone sovereign debt crisis, which ironically singled the UK out as a relative safe haven.

However, we believe that investors are losing confidence in the government’s ability to reform the public finances as a result of the economy flat-lining and the fiscal and debt targets being pushed back. In addition, a stabilisation of the eurozone as a result of more assertive action from the European Central Bank has reduced the demand for safe haven assets. With these two supports for the pound – fiscal credibility and safe haven status – slowly eroding, and UK economic activity still inert, it is difficult to see how sterling can keep up the façade of strength. We caution that should the pound make a strong push below US$1.50/GBP, a move towards US$1.40/GBP would not be unfounded.

Brazilian Real Forecast Revised Up

Elsewhere, we have revised our forecasts for the Brazilian real to reflect greater strength this year, as we believe inflation will remain a salient concern for the monetary authorities over the coming months. Indeed, in our previous currency forecast update, we highlighted that should inflation spike, we could see the central bank allow for a greater appreciation of the currency, a risk which has played out in recent weeks. January’s rate of inflation came in at the highest level (6.15% y-o-y) in 12 months and both the Central Bank President and Finance Minister have made statements that suggest the real may remain in a relatively stronger trading range in the short term. In order to account for the current rally and potential for a relatively stronger real over the coming months, we have revised our 2013 average forecast to BRL2.0000/US$, from BRL2.0700/US$ previously.

That said, we continue to expect real weakness over the medium term, forecasting the unit to end 2013 at BRL2.1000/US$ and 2014 at BRL2.2000/US$. This is because we believe government policy remains biased towards a relatively weak exchange rate, we forecast domestic interest rates to remain near historical lows, and anticipate that weaker base metals prices will translate into more modest investment inflows into Brazil in H2 2013.

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This Week’s Trivia Question

Last week’s question was about ancient institutions, and was inspired by the Pope’s resignation.  We asked, the day Pope Benedict XVI announced his retirement, an even older institution than the Papacy marked its 2,673rd anniversary. What is that institution? And which organisation celebrated its 900th anniversary over the previous week? The answer to the first question is the Japanese imperial family (and for that matter Japan as a nation, which officially came into existence on February 11, 660 BC). The answer to the second question is the Knights of Malta.

This week’s question is about currencies. Apart from the Brazilian real, what other existing currencies’ names are derived from the same root word as the real? And which currencies in the world have a value greater than one US dollar?