Legg Mason’s fixed income subsidiary Western Asset has decided to move long sterling against the US dollar.
According to the firm’s global head of Derivatives Prashant Chandran, the sterling is looking very attractive aginst the US dollar after it has fallen around 16% since the Brexit referendum in June, from $1.49 to $1.24 versus the US dollar.
“The UK currently runs a 2% current account surplus with the US, and a weaker sterling should only serve to increase exports and thus increase that surplus. As a result, we expect GBP to appreciate against USD over time,” he assessed.
Chandran pinpointed that in terms of purchasing power parity, sterling also looked cheap versus the US dollar.
“Looking at the GBP/USD rate from a Purchasing Power Parity (PPP) perspective over the last couple of decades, with the economies of the US and UK economies growing at trend rates (3.5% and 2.5%), and with small current account deficits (1% and 0.5% approximately), it gives an average GBP/USD level of fair value significantly higher than current levels,” he argued.
Chandran added the Legg Mason Western Asset Macro Opportunities Bond fund exploits it by going long sterling vs the US dollar, with the Brexit vote and subsequent negotiations creating an opportunity to benefit from near term volatility in the currency.
“We’re currently long GBP/USD in the strategy, with a 2.2% position in place, and if there was any further depreciation for sterling we might look to cautiously add more,” he said.