Why You Should Buy the Pound Before May 6
CNBC EMEA Head of News
The worst outcome for the UK election – a hung parliament – has already been priced in, and some analysts forecast the pound could appreciate by up to 15 percent after the May 6 vote.
Who is Nick Clegg and could he really be the next UK Prime Minister? Just one week ago even voters in the UK would struggle to answer the first question and would have laughed you out of the room for even asking the second question.
A week though is a long time in politics and as the leaders of the three main political parties in the UK prepare for the second of three TV debates before Britain goes to the polls on May 6th, there is a very real prospect of the relative unknown getting his hands on the keys to Number 10 Downing Street.
Have I gone mad you may be asking? Well there is certainly no chance of Clegg's Liberal Democrats winning the May 6th poll outright, but after shining in the first TV debate Clegg has found himself neck and neck with David Cameron and ahead of Gordon Brown in the polls.
If the current polls are mirrored in the actual vote, then this means a hung parliament is assured. David Cameron warned Thursday morning that this outcome would be an economic disaster for the UK and the pound. He warns that anything but an outright victory for him would lead to Britain's credit rating being downgraded and a sterling crisis.
Unfortunately for David Cameron, this message is not winning the argument and the man who hoped to own the 'change' message has found himself usurped by Nick Clegg who has looked increasingly assured in a series of TV interviews since winning last weeks first debate.
That could turn around, but the team behind David Cameron are very worried as unless they can find a game changer over the next two weeks, they are facing up to the prospect of watching Brown and Clegg forming a coalition government on May the 7th.
Brown to Run the IMF?
If we assume that will be the case, then it is interesting to consider who would actually lead a Labour/Liberal Democrat coalition.
Due to the way the UK electoral system is set up, Labour can come in third at the polls but remain win the largest number of seats in the House of Commons. Clegg's Liberal Party could win 40 percent of the national vote and remain the third biggest party at Westminster.
If Gordon Brown where to win say 25 percent of the vote and Clegg where to pick up 40 percent, it would be difficult for Brown to lead the next government with any credibility.
With a job about to come up running at the IMF, there is a remote chance that his own party might demand he go after throwing away the huge majorities won by Tony Blair at the last three elections.
If this were to be the case, and it is a big if, could Labour put up a new prime minister with Clegg winning the popular vote?
Buy the Pound
Jim O'Neill from Goldman Sachs told CNBC that the pound is a buy and will be the best performing major currency in the second half of the year.
While O'Neill believes the country's budget deficit needs to be brought under control, in the short term he believes there is no need to rush through spending cuts until it is clear the economic recovery is sustainable.
If this was not the case, O'Neill believes the market would be demanding spending cuts by selling gilts and the pound aggressively.
O'Neill's view is backed by Thanos Papasavvas, the head of currency management at Investec Asset Management. He believes the pound could rise by 10-15 percent after the election if there is a hung parliament, a prospect that he says is already priced into the pound.
"For all the doom and gloom, the market is aware that a Labour/Liberal coalition would get to grips with the budget deficit in the medium term," he told CNBC.
There is some good news for David Cameron Thursday from an ITV/ComRes poll showing support for Clegg dropping off and returning to the Conservative Party.
Putting Cameron on 35 percent with Clegg and Brown on 27 percent and 25 percent respectively, it offers hope that Cameron can turn things around but still points to a hung parliament.
If Cameron is to form the next government, he needs more and this poll is not reflecting the majority of other polls at this time. Two weeks is a long time in politics but a lifetime contemplating how you lost an election that was yours for the taking might drag on a bit for Mr Cameron.