Pound Is Poised for Goldman Rally.... Oct. 26 (Bloomberg) -- The U.K. pound, trading at the cheapest level against the euro in a decade, is making everything from Ipods to Toyotas less expensive for foreigners and turning Goldman Sachs Group Inc. into a sterling bull.
Purchasing power parity, a measure of the relative cost of goods, shows the currency is 22 percent below where it should be, according to data compiled by Bloomberg. Sterling hasn’t been so inexpensive since 1999 after Bank of England Governor Mervyn King flooded the economy this year with 175 billion pounds ($285 billion) buying government bonds to keep borrowing costs from rising as the economy shrinks.
“The U.K. is cheap, its properties are cheap, its companies are cheap,” said Stephen Jen, a money manager at BlueGold Capital Management LLP in London and the former head of foreign exchange at Morgan Stanley. “Friends and family who have visited me always complained about the cost of living in London, but they have since stopped complaining.”
U.K. assets from houses to soccer clubs have been discounted as the seizure in credit markets drove the economy into its worst recession since World War II, forcing Prime Minister Gordon Brown’s government to take stakes in two of the nation’s biggest banks......
The pound’s slide is fueling mergers and acquisitions in the U.K., bringing the first net inflows to the country in three years, Bloomberg data show.
The last time that happened, in 2006, the pound jumped 2.1 percent versus the euro and 13 percent against the dollar, the biggest gain in 16 years.........
Goldman Forecast Goldman predicted this month that sterling will appreciate 9 percent versus the euro to 84 pence by year-end, and by 14 percent to $1.85, even as U.K. debt quintuples as a percentage of gross domestic product. Jen sees the currency climbing 7.6 percent to $1.75.......
Two-Month Slide The pound fell 4.4 percent against the dollar in August and September, the steepest two-month drop this year, amid speculation King and his Bank of England colleagues favor a weaker currency and expanding the central bank’s asset-purchase program
[I covered this flawed speculation and its impact in previous posts] .......
‘Ridiculously Cheap’“Sentiment for sterling is extremely negative,” said Nigel James Rayment, a money manager in London at JPMorgan Asset Management, which oversees $1.3 trillion, including $60 billion in foreign-exchange assets. “Against the euro, it looks ridiculously cheap,” with fair value at about 80 pence, he said.
The pound may rally to $1.80 by year-end, according to Rayment, who co-manages the JPMorgan Sterling Managed Currency Plus Fund.......
Goldman Sachs advised clients to buy the pound in March, and dropped the recommendation when the currency climbed to $1.65 in June, a bet that returned 12 percent when accounting for changes in interest rates. It began backing the pound again on Oct. 15........
“The market is way too bearish on the U.K. economy and way too short sterling,” said Thomas Stolper, an economist at Goldman in London. “The Bank of England has a history of surprising the market.” King may boost rates as soon as April, said Stolper.
Barclays predicts the pound will rise about 8 percent to $1.76 in March, and gain 7.6 percent to 85 pence per euro.
“There’s more inflation pressure in the economy than people realize,” Paul Robinson, a currency strategist at Barclays Capital in London who worked as an economist at the Bank of England for 11 years until 2006. “The BOE is likely to tighten policy a bit earlier than the market thinks. Sterling has to appreciate as the clouds clear.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net Last Updated: October 26, 2009 07:18 EDT 
- Citizens of other countries may well feel the same about what happens with their currencies as well.
