Pound May Rise 13% Versus Yen as Equities Rally, Says Citigroup

By Candice Zachariahs

Nov. 5 (Bloomberg) -- The pound may rally against the yen and the dollar as an expected Bank of England interest-rate cut will boost growth prospects and technical charts predict a rally, UBS AG and Citigroup Inc. said.

Investors should buy the pound against the yen as the U.K. currency strengthens ``possibly as high as 180,'' wrote New York- based Tom Fitzpatrick and London-based Shyam Devani, technical analysts at Citigroup, in a research note yesterday. The BoE will cut rates 50 basis points to 4 percent tomorrow, according to the median estimate of 60 economists surveyed by Bloomberg News.

The VIX volatility index, reflecting expectations for stock price movements and risk aversion closed at its lowest since Oct. 3 yesterday, falling for a forth day. The measure may continue to decline, wrote the Citigroup analysts in a separate note, pointing to gains in the Standard & Poor's 500 Index.

``We look at the pound-yen chart and believe it can be a big beneficiary here,'' Fitzpatrick and Devani wrote.

Investors should buy the pound at 160.29 yen, targeting an initial advance to between 165 and 166 yen, the Citigroup analysts said. They should exit the trade if it weakens to 157.40.

The pound rose for the second day to 159.50 yen at 7:46 a.m. in Tokyo from 159.11 yesterday. The currency fell 25 percent over the past three months. It bought $1.5986 from $1.5956 yesterday.

The S&P 500 advanced 4.1 percent to 1,005.75 yesterday as U.S. equities posted their biggest Election Day rally in 24 years ahead of the Presidential results today.

Rate Cut

The pound may also gain against the dollar if the BoE announces a larger-than-expected interest rate cut when it meets Nov. 6, wrote London-based UBS analyst Geoff Kendrick.

``In times of economic stress markets may become more concerned by future growth rates as a driver of future returns than movements in cash rates,'' he wrote.

Eight economists polled by Bloomberg forecast a 100 basis point cut, and six expect 75 points.

``With markets already pricing 75 basis points for Thursday, this implies that the pound will sell off on a 50 basis point cut and bounce on a 100 point one,'' Kendrick wrote.

The Australian dollar pared losses against the dollar and yen yesterday after the country's central bank lowered its benchmark rate by a greater-than-anticipated 0.75 percentage point to 5.25 percent.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net