Goldman Sachs on cable:
Since we reiterated our 3-month target of 1.20 for GBP/$, Cable has fallen sharply to within striking distance of our forecast*.
Given how much Sterling has now fallen, much of the market dialogue revolves around the idea of with many making the point that the Pound is now very cheap. Indeed, on our fair value model for exchange rates, something we call GSDEER, GBP/$ is now slightly more than one standard deviation cheap, the first material undervaluation in a long time (Exhibit 1). The problem is that GSDEER and models like it tend to generate estimates for fair value that are essentially long-term moving averages of the exchange rate, which means that they do not allow for structural breaks of the kind that the referendum and the rising odds of a Brexit clearly represent. In other words, fair value in models such as GSDEER has likely jumped lower, although the extent to which this is the case is difficult (and somewhat arbitrary) to model.
