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What next for the UK? - July 2016Anxiety compounds currency crisis
One of the immediate effects of the EU referendum in June was seen in the price of sterling, which plummeted to its lowest level against the dollar in three decades.
Sterling fell 7.6 per cent against the dollar on June 24, and the currency had slipped 5.9 per cent against the euro in the same period, data from FE Analytics shows.
For the year to date to June 24, the pound is down 7.2 per cent against the dollar and down 9.5 per cent against the euro, with many expecting sterling to be the hardest hit in the coming months as negotiations to exit the EU begin.
Joshua Mahony, market analyst at IG, an online trading platform, points out: “In the event of a Brexit, the chief victim for sellers was always likely to be sterling, which will suffer from capital outflows as money is moved to safer seas. With that in mind, it is no surprise that we have seen substantial declines.”
Uncertainty and doubt could gnaw away at the pound for years David Lamb, Fexco Corporate PaymentsHe continues: “Economic and political uncertainty in the UK, combined with additional monetary easing from the Bank of England, may well see the pound fall further – to as low as $1.20. However, even this would be less dramatic when seen in the context of the last few years. The pound had already fallen from a high of $1.70 in mid-2014 to below $1.40 in February this year. What’s more, this was in the context of an extended period of generalised strength in the US currency. On a trade-weighted basis, the pound is only back to where it was during most of the period from 2009 to 2015.”
Chris Towner, chief economist at HiFX, notes that while the volume of currency being transferred overnight as the results of the referendum came in increased by more than 500 per cent, now the result is final sterling is starting to find some poise.
He adds: “Everything depends on what happens next. Sterling has seen its most volatile session in more than 20 years with sterling/dollar dropping from 1.50 to as low as 1.32 before regaining its footing. Because this has a negative impact on the euro, the weakness in sterling against the euro has been less severe.”
But while the currency may have stabilised at the end of June, Paul Lambert, head of currency at Insight Investment, says the result will have a lasting impact on sterling.
“We expect it will bear the brunt of what are likely to be less favourable relationships with some of the UK’s most important trading partners. In addition, and over the longer term, it will need to adjust to what is likely to be a significant and negative growth shock as businesses and consumers defer spending activity until there is clarity on the terms of the exit. Overall, we expect sterling to depreciate.”
| Sterling versus dollar |
| In its Capital Daily outlook ‘Will the calm continue after the UK’s vote for a Brexit?’ John Higgins, chief markets economist at Capital Economics, notes sterling’s exchange rate against the dollar of around $1.36 to the pound [June 27] is “still a lot lower than the $1.50 reached late on Thursday”. But he says: “It is not much different from the level that it reached a week earlier when the opinion polls first began to suggest that a Brexit was likely. Therefore, it seems disingenuous to suggest sterling has collapsed in the wake of this outcome.” |
David Lamb, head of dealing at Fexco Corporate Payments, highlights that the painful question now is how far, and for how long, will sterling fall? But he adds: “Talk of free fall is overblown. With Mark Carney pledging to do whatever it takes to prop up the UK economy, in many ways we’re back to where we were a few months ago. The difference now is the uncertainty has no end date.
“With [David] Cameron’s decision to go likely to delay the formal start of Brexit negotiations, the messy business of Brexit will take even longer. As a result, uncertainty and doubt could gnaw away at the pound for years. While a prolonged fall in sterling will help British exporters, the financial markets are entering an unknown future of extreme volatility. Such severe swings will create winners, losers and many sleepless nights.”
| KEY NUMBERS |
7.6% Fall in the pound versus the dollar on June 24 following the result of the vote $1.32 The level of sterling versus the dollar as of June 27 2016 15-20 Total potential percentage fall for sterling, according to some forecasts |
John Greenwood, chief economist at Invesco Perpetual, adds that now the voters have had their say, the action will switch to the markets in the short term and the government and exit negotiations with the EU in the longer term.
On the initial non-sterling impact, he said: “The euro could also be adversely affected as investors assess the possible knock-on effects. Most likely, the US dollar, Japanese yen and Swiss franc would be regarded by investors as preferred ‘safe havens’.”
John Bilton, global head of multi-asset solutions at JPMorgan Asset Management, adds: “Volatility in sterling relative to other currencies represented the biggest single-day move in three decades. We could be looking at a top-to-tail move of 15-20 per cent as sterling reprices. Hedging costs implied by the FX options market are still elevated, suggesting significant uncertainty remains. We’re likely to see at least another quarter of heightened uncertainty, during which sterling will bear the brunt of the impact. Our best estimate is that we may settle on a target of around 1.25 for sterling/dollar.”
Nyree Stewart is features editor at Investment Adviser
