Why the pound can keep rallying despite the Brexit spectre

Vintage U.K. five pound noteVintage U.K. five pound note

The British pound has been rallying, in part on expectations the Conservatives appear set to win a majority, but even if the U.K. faces another hung Parliament, sterling can continue to strengthen, said Jim Leaviss, head of fixed income at M&G Investments, on Thursday.

“Sterling is a cheap currency,” Leaviss said in a media briefing. “On any kind of fundamental analysis, the pound was looking somewhere between 15 to 25 percent cheap to the dollar [at the August lows]. So if you believe that there’s going to be some stability and so forth, then just to get back to fair value you have room to go.”

The pound was fetching US$1.3156 at 1:09 P.M. SGT, up from as low as US$1.1959 in August, according to Bloomberg data.

Leaviss said he still saw some upside for sterling.

“We’ve been gradually adding sterling throughout the year — not because we knew what the election result would be or what the outcome of Brexit would be — but simply because we thought that even if we did get a bad Brexit outcome, the fundamentals were supportive of a bounce and the investment position had gotten so bearish on the pound, almost any news would be good news,” he said.

Leaviss noted that a hard Brexit hasn’t yet been ruled out, if Conservatives win a majority.

“Perversely, a hung Parliament delivers a change of no Brexit, whereas Conservatives’ victory delivers definetly Brexit and possibly a hard Brexit, he said. He pointed to the last election’s last minute surge of support for the Labour Party and cautioned against assuming the Tories’ current lead in the polls would necessarily translate into a majority in Parliament.

Not all pound-watchers think the currency’s runup is election-agnostic.

Boris Schlossberg, head of foreign-exchange strategy at BK Asset Management, said in a note Thursday the rally was likely on expectations that the Conservatives would have large enough majority to push through a Brexit deal.

“The run-up cable is essentially a bet on the fact the U.K. will be out of EU in name only, but practice will remain a key member of the market adhering to most of the block’s trading rules while having no political say in how those rules are set,” Schlossberg said. “For now, that is the dominant theme in the market.”

Schlossberg tipped the pound would hit a top near US$1.33 to US$1.34 on election eve.