Key takeaways: sterling anchored - Socgen

Kit Juckes, an economist at Societe Generale offered a snapshot of currency markets key takeaways.

Key Quotes:

"The third big US dollar rally of the post-Bretton Woods era has stalled:
At current levels, it's significantly overvalued, and a shift in the relative momentum of economic growth and monetary policy from the US to Europe suggests that new highs are unlikely. The way down will be uneven and frequently interrupted, but the clear winner should be the euro.

Japan and the euro area have both managed to combine large current account surpluses with undervalued currencies, thanks to very aggressive monetary policy:
But the ECB's shifting focus means they are set to choose winding down their asset purchases programme over keeping the currency this week. The danger is that it suffers a temporary overshoot to the upside. Long EUR/GBP and long EUR/JPY are both attractive.

Sterling is anchored:
A weakening economy, a surfeit of political uncertainty and the prospect of a widening interest rate differential with both the US and euro area will keep sterling down, but valuations provide a measure of support. We expect USD/GBP to trade below 1.25 but not through 1.20, and we look for EUR/GBP to move into a 0.90-0.95 range.

In carry we trust:
Global investors are still underweight emerging market assets, and a slow pace of policy normalisation combined with steady global growth will feed the allure of higher-yielding currencies. The MXN, TRY and ZAR stand out.

As the year progresses and Chinese growth starts to falter, this equilibrium may be threatened: 4Q looks set to be more difficult than 3Q, and we prefer Latam and EMEA currencies in general, over Asian ones (the INR is an honourable exception)."