Investors should bet the pound will rise against the dollar, euro and yen in 2011, according to Nomura Holdings Inc.
Great Britain’s currency, which has fallen 20 percent against the dollar since 2007, is set to rebound as the likelihood lessens Bank of England policy makers will follow the U.S. central bank in buying government debt, or so-called quantitative easing, Nomura Holdings said. The company has invested the pound against a basket equally weighted in euro, dollar and yen.
“The basic reason is Bank of England QE2 risk was linked with Fed QE2 risk in September and October and that was a completely incorrect view of how the bank sees things,” said Geoff Kendrick, head of European foreign-exchange strategy at Nomura Holdings in London on a conference call today. “We’re playing it through the basket to take out the otherwise negative dollar correlation with euro-sterling.”
Nomura projected the pound trading at $1.63 in the first quarter of 2011, down from a previous forecast $1.67, and finishing the year at $1.73. Today it rose 0.6 percent to $1.5806.
Investors had speculated the U.K. would follow the U.S. in a second round of debt purchases to spur inflation and growth, and that the extra liquidity would debase the currency.
“Fiscal consolidation plans are likely to remain credible and reduced political risks from a stronger-than-expected coalition government should support the sterling in the year ahead,” strategists including Kendrick wrote in the report released today.
Nomura forecast the euro will fall to $1.32 in the first quarter, down from $1.35, and rise to at the $1.35 level by Dec. 2012. In the same periods it sees the Japanese currency at 80 yen per dollar, then weakening to 85. The euro traded today in New York at $1.33 and the yen traded at 83.13 per dollar.