Currency Corner: is it comeback time for the pound?

Everyone knows the pound is undervalued, says Dominic Frisby. But once Brexit is sorted, it will rally. And we are looking down the barrel of that now.

Swiss franc notes and UK pound notes © Chris Ratcliffe/Bloomberg via Getty Images

Are we at the start of the pound's long-awaited Brexit recovery?

The rumour floating about for some weeks now is that Boris Johnson and the European Union are getting closer to securing a deal for the UK to leave the EU on 31 October.

Any such deal obviously still has to get through Parliament, which is an interesting question in itself.

It will be decided at the margin. There are many MPs the direction of whose vote we already know.

But will those Leaver MPs, who would prefer no withdrawal agreement, compromise and support a Johnson deal? Will those Remainers representing leave-voting constituencies go with their hearts and vote against? Or will some vote for a deal, in a last-ditch attempt to save their seat at the next election?

By hook or by crook, I think he'll get it through (assuming he gets one). The forex markets certainly seem to think he will.

From $1.19 in early September, the pound was within spitting distance of $1.26 yesterday. Against the euro, there has been a similar rally, but since early August the pound has been surging from €1.07 to just shy of €1.14.

We all know the pound is undervalued. I've been saying it till I'm blue in the face: the pound will rally once Brexit is sorted. We are looking down the barrel of that now.

Your bet on sterling depends on which outcome you see as most likely a Johnson deal, no deal or delay.

Fair value for the pound is somewhere closer $1.50 and €1.25. With that in mind let us consider what some say is the trade to play a sterling recovery the pound against the Swiss franc.

Sterling versus the Swiss franc

Currently a pound will buy you CHF1.24. The low was in August at CHF1.16.

Here's a 20-year chart, since 1999. The pound bought CHF2.70 back in 2000.

Chart of the pound vs the Swiss france

What can I say? One nation looks after its currency; one doesn't.

Look at those declines in the 2007 to 2011 period. Oof.

If you pulled back and looked at a longer time frame, the story is even worse. Back in the 1970s, I remember my dad took me skiing and you got as many as six Swiss francs to the pound.

So the broader story is one of endless decline.

That said, we see something of a low on the above ten-year chart, where I've drawn the dashed red line, at around CHF1.15.

In the context of that chart, the rally from CHF1.16 to CHF1.24 that we have seen since August is tiny.

However, short-term trend followers will already be jumping on board of this, and of course, if Johnson gets his deal through, then this rally will have legs. CHF1.30 and, eventually, CHF1.40 both look possible.

According to my favourite, long-term trend following system see here for more details we don't yet have a buy signal. But this is based on weekly moving averages so is inevitably a little behind the curve. Its aim is to catch long-term trends, not short-term.

All in all, the Swiss look after their currency. We don't. Brexit or not, that is unlikely to change. So, unless we have some huge cultural shifts in our leadership, especially at the Bank of England, and sound money is suddenly prized, we will continue to devalue.

(In fact, some mathematicians have studied the probability of a change in attitude at the British establishment towards its currency, and compared it to pigs flying and found that the latter is more likely).

So it is probably better to play a longer-term sterling recovery against the currency of a nation that is less inclined towards preserving the purchasing power of its money.

The Swiss franc should be nothing more than a short- to intermediate-term play. For now, CHF1.15/1.16 is a clear line in the sand. You do not want to be "long" below that level.

Above it maybe.

Recommended

The currencies to bet on this year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
Buying bitcoin could be the best way to play the remote working boom
Bitcoin

Buying bitcoin could be the best way to play the remote working boom

The coronavirus pandemic has accelerated the move to home working, flexible employment practices and the rise of the “digital nomad”. One of the best …
21 Oct 2020
The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
The charts that matter: pre-election paralysis
Global Economy

The charts that matter: pre-election paralysis

Markets are caught in the headlights as the US election approaches fast – John Stepek looks at how the charts that matter most to the global economy a…
17 Oct 2020

Most Popular

Why commodities could be the best investment for 2021
Commodities

Why commodities could be the best investment for 2021

There’s plenty for investors to worry about right now. But things will inevitably recover. And the sector most likely to do best when they do, says Jo…
22 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
Buying bitcoin could be the best way to play the remote working boom
Bitcoin

Buying bitcoin could be the best way to play the remote working boom

The coronavirus pandemic has accelerated the move to home working, flexible employment practices and the rise of the “digital nomad”. One of the best …
21 Oct 2020