Strategists at at one of the world's largest investment banks believe that 'risk:position' asymmetries in global foreign exchange markets make the British Pound the ideal candidate for a rally while an expected turn lower in global equities leaves the Australian and New Zealand Dollars exposed to potential weakness.

Strategists at Morgan Stanley therefore believe that a bet on the Pound, funded by either the New Zealand or Australian Dollar, could yield positive returns.

We have already reported this week that Morgan Stanley are fans of the Pound citing five reasons as to why the currency might be about to appreciate.

Today we are able to report further insights into the view, and its implications for the GBP/AUD and GBP/NZD exchange rates in particular.

Analyst Hans Redeker notes the symmetry of potential outcomes has seen them stand back from trading USDJPY and EURUSD. Instead, “we beat the drum on markets where there are risk:position asymmetries such as with GBP,” says Rekeder.

Yesterday did see GBP breaking higher with the support of strong inflation data.

Headline inflation has reached its highest level since September 2013and core inflation has advanced from 1.6% to 2.0%.

BoE’s Carney suggesting not putting too much emphasis on a single data point is the correct attitude a central bank’s target.

Moreover, the CBI reported manufacturing optimism reaching levels not seen since John Major was PM.

“All this information finds a heavily short positioned GBP market,” says Redeker.

Betting Against the New Zealand and Australian Dollars

“We have expressed our bullish GBP view via funding in NZD,” says Redeker, “likewise we could have chosen the AUD. Both currencies have experienced significant equity related inflows funding their foreign liability positions.”

Accordingly, it is believed both currencies will lose should shares continue to fall.

China tightening its monetary conditions and commodities coming off their highs will not bode well for the AUD.

On the NZD side Morgan Stanley expect the RBNZ to provide a dovish tilt to the outlook reacting to the weak Q4 GDP report and sluggish household income data.

The call comes as the Pound to New Zealand Dollar exchange rate tests its 200-day moving average; a sign that it could be about to turn bullish over longer-term timeframes.

There is also the argument being made that the long-standing support offered by yields on bonds in New Zealand and Australia is fading.

“Both currencies may in the future not qualify in the high yield FX category as real yields have come down,” says Redeker.

Typically investors would have borrowed in the likes of Pounds, Euros, Yen and Dollars to fund investments in high-yielding jurisdictions like New Zealand and Australia where interest rates are higher.

This has supported the likes of the AUD and NZD.

However, as Redeker notes, this source of support could be fading.