Sterling likely to move lower in coming weeks: Morgan Stanley

Post Brexit the main risk for the British economy is to lose inward investment, says Hans Redeker of Morgan Stanley.In an interview with CNBC-TV18, Redeker gave his outlook on the european market and talked about the plausible movement in the pound sterling in coming days.He said that as the sterling weakness is not accompanied by asset volatility at the moment, the sterling is likely to move lower over the next few weeks.Below is the verbatim transcript of Hans Redeker’s interview to Manisha Gupta on CNBC-TV18. Q: What is your sense now coming in when you look at pound sterling? USD 1.20 is the level that Goldman Sachs, JP Morgan even Societe Generale are talking about. A: Every effort to deviate between short term correct effectivity and what is likely to happen within the next few weeks and month and after Brexit the main risk for the British economy is to lose inward investment. Investment activity is required to keep the labour market stable and you need to have stable income levels in order to keep housing and other asset markets supportive. So, the British authorities are going to take an approach to support the supply side of the economy for which you may need a weaker exchange rate and to have a front loaded weakness of the exchange rate and I guess that is currently happening. So, the inflation expectations after Brexit were rising. At the same time nominal yields were declining. So, that actually means that you have seen a significant adjustments in rear yields in the UK and significant adjustments in rear yields to lower levels is undermining sterling and I believe that authorities wants to have lower sterling under orderly market conditions. If you would see sterling weakness being accompanied by asset volatility then it is a different matter. But at the moment we don't see that and therefore sterling is going to move lower over the next few weeks.Q: Where do we see the currency headed to and there have been so many reports on how we could see a parity for pound vis-a-vis euro, do you see that happening? A: To compare it with the situation of 1985, that was the last time when the relationship between sterling and US dollar was hitting parity but that was more a US dollar story than anything else. You have to also consider that this time sterling in trade weighted index terms is much weaker than it used to be in 1985 and that means that the weakness, broader base is helping much more the British economy than it was doing so in 1985. So, maybe parity is farfetched but from current levels we may have may be another 8 or 9 percent to go towards the downside. So, the question then is, is the focus sterling versus US dollar, is it the right focus or should you actually look into the relationship between euro versus sterling. Many were assuming post Brexit that the euro would be the next one to hit and I doubt that, that is not because I think that the situation in Europe is looking economically so much better, that is not the case. However in Europe you have current account surplus and secondly and most important you have financial institutions with very weak balance sheets and they are not able to export long term capital in sufficient enough quantities to counter balance the current account supportive effect for the euro. Therefore the euro goes up because of commercial buying needs.