Market volatility is increasing over the upcoming cliff-hanger Brexit referendum. It is playing havoc especially on the sterling pound. Speaking to Bloomberg TV India , Mitul Kotecha, Head of Asia Forex Strategy, Barclays, says the case scenario is that the UK will stay within the EU.
How would you like to position yourself for the sterling moment ahead of the policy meet and also the decision on Brexit?
I think a lot of negativity has already been priced in the sterling ahead of the EU referendum. The volatility and uncertainty has been hitting sterling. It seems a little bit off the rally in recent weeks because markets have priced in a lot. I think we are going to see volatility in the next few weeks. And what I feel is a bigger concern is the Euro — where we think the euro has already priced in any real risk scenario if the UK does exit the EU. I think this still needs to be priced in the Euro. As far as the Bank of England is concerned, we don’t expect any change in policy. What we do expect to see is a revision in growth forecast with both international and domestically revised lower. In the inflation report, it has been forecast to remain unchanged. Sterling would trade a little bit cautiously.
It has been some disappointing data and we do have the European industrial production reading because we are now expecting some of the country readings that you mentioned to fall in Euro zone industrial production of around 1.7 per cent. Now the European data on the whole has been reasonably okay. It is showing some bottoming out. We still think the Euro zone will sustain in the months ahead. The US growth continues to improve and show outperformance versus Europe. We expect euro-dollar depreciating in the months ahead.
How should the Indian investors position themselves ahead in terms of the Brexit meeting and in terms of what is happening in both euro and sterling?
I think when you look at the move in euro and sterling in the last few months, it has been significant and moved close to 80-level. I think foreign investors would clearly still be cautious ahead of the referendum. Our base case is that the UK will stay within the EU. In reality, it would lead to more caution in the way investors will continue to trade the currency. But all of this said, we are more concerned about the fact that uro has still not priced in this risk.
Let’s now move from euro and sterling to yen. Market intermediaries fear BoJ has helped in some short covering and also to move back to 109 to a dollar. What’s your opinion of yen at present?
I think what we have seen in dollar-yen, the move has been rapid in recent weeks. And this is a time of readjustment, to be honest. We don’t expect any upside move in the dollar-yen to be sustained. Technicals suggest it is going to be capped around just about the 110-level and I think what we will see is a renewed move lower in dollar-yen. Even if there is intervention, the impact will be limited. Even if there is a new policy, the impact on yen will be limited.