Sterling headed lower in 2017, PIMCO says

Sterling was headed lower in 2017, analysts at PIMCO predicted.

In a contrarian call, Thomas Kressin, a portfolio manager at PIMCO, told Bloomberg News the pound would drop as a result of the political risks related to the referendum vote and the country´s large current account deficit.

That was despite Sterling trading 5% below the level implied by so-called purchasing-power-parity economic models.

The median forecast from analysts polled by Bloomberg was for the pound to fall to 1.22 versus the US dollar by the middle of 2017 and to afterwards recover to $1.25 by the end of the same year.

Some long-run macroeconomic PPP theories predict very long-term values of exchange rates on the basis of the price differentials for goods and services between countries, whereas some short-term models tend to focus on interest rate differentials or relative changes in the the flows of goods and capital captured by countries´ balance of payments.

“The pound has one of the worst current-account deficits in the developed world and remains vulnerable to Brexit headline risks,” Munich-based Kressin said in an interview.

On a related note, Kressin said PIMCO was not holding any positions in the European single currency even though it too was undervalued, as the upcoming French elections came increasingly into focus.

“It is very hard to put a price on political risk. This is all unprecedented. Last year’s events proved how hard this is. I am not sure that even those who called Brexit and Trump right made money.”