FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that the increased focus on ‘Brexit’ as we wind down for the festive season continues to weigh on the pound with a notable gap opening up between the current EUR/GBP spot rate and the level implied by our short-term valuation model.
Key Quotes
“Adding to the negative sentiment yesterday was the budget deficit data that was much worse than expected and strengthened the likelihood that the deficit target – only just updated last month by the Office of Budget Responsibility – will be missed. In November alone, the deficit figure was GBP 14.2bn, up from GBP 12.9bn in November last year. In the eight-month period of the current fiscal year, the deficit has now reached GBP 66.9bn, a mere GBP 2bn below the target for the full year – running a deficit of just GBP 2bn over a four-month period appears highly unlikely.”
“The big unknown will be January – the deadline month for when self-assessment tax returns must be completed that generally results in a large surplus being recorded. However, even with a GBP 10.4bn surplus in January last year, the UK still recorded a deficit over the four-month period (Dec-Mar 2015) of GBP 15.8bn. In 2014 the deficit was GBP 24bn. Taking the last strong pre-crisis year (2007-08), the four-month deficit totalled GBP 7.5bn. However, a GBP 2bn deficit would not be unprecedented although you have to go all the way back to 2001-02 (GBP 0.5bn surplus) to find a Dec-Mar period when the budget balance was smaller than a GBP 2bn deficit.”
“The OBR did state that changes to the way self-assessments can be completed (made easier) is likely to result in a much larger surplus than in previous years. So we shouldn’t entirely rule out the GBP 68.9bn target being met, although it seems highly unlikely, especially given the blame lies with sluggish tax revenues that appear to have become a more persistent problem.”
“The current OBR projection is for the budget deficit as a percentage of GBP to fall from 5.2% last year to 3.9% this fiscal year. A slightly higher deficit on top of a very large current account deficit of around 5% of GDP leaves quite a notable combined ‘twin deficit’ of around 9% of GDP. Data on the current account will be released this morning with the Q3 deficit expected to widen to GBP 21.5bn from GBP 16.8bn in Q2. The four-quarter total would then fall from GBP 94.4bn to GBP 91.1bn, or 4.9% of GDP.”
“Still, we do sense that perhaps the negative pound sentiment might have become a little excessive or perhaps the scale of selling in relatively illiquid markets has over-extended to the downside. Our short-term models may well be skewed indefinitely given ‘Brexit’ risk may be difficult to capture but certainly based on our valuation models, any easing of ‘Brexit’ fears may well prompt a sharp reversal of recent pound weakness.”
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