Three months after Britain’s vote to leave the European Union, fears in currency markets of a “hard Brexit” that would drive an exodus of banks from London have knocked sterling to within sight of its weakest levels in decades.
It has been a rollercoaster ride for investors and companies worried by or speculating on the value of the pound, which slumped 13 cents on the shock result of the June 23 vote but had recovered around half of that by early this month.
That broadly reflects shifts in expectations of how the economy will deal with the fallout from talks that may deprive Britain of its membership of the single market as the quid pro quo for imposing controls on immigration.
Comments from some of the ministers responsible for steering Brexit have raised expectations of that more disruptive scenario in the last 10 days, knocking sterling back below $1.30 and to a six-week low of 87 pence per euro on Monday.
The pound was pinned around those levels yesterday.
“If you take (Prime Minister) Theresa May at her words, we will go for a hard Brexit and that is clearly a worry,” said Neil Mellor, a strategist with Bank of New York Mellon.
“It’s about the huge amount of activity that the UK would be precluded from doing. Clearing (of euro trades) is one issue and there are a lot of activities that relate to that.
“Given how important the City is to the UK in terms of growth...it is a negative.” Forecasts for the pound after the vote were almost universally bleak. A number of major banks predicted a fall to around $1.20, levels not seen since the Plaza Accord’s move to weaken the dollar in the mid-1980s.
But the pound has so far held up better than that, bottoming out in early July at $1.2798, still a 30-year low but a long way short of many forecasts.
Analysts and traders have argued since about the reasons for the halt.
Many point to record-high market positioning against the pound that means there is limited space in the trading books run by banks and speculative investors to bet further against the British currency.
Those bets were trimmed in the last month.
Others, including custodial bank State Street, have pointed to hedging against the pound done by the big long-term fund investors in the days after the vote, which investors have been steadily closing out — in sterling’s favour — since. “Investors (at the time) bought gilts, bought UK stocks and hedged the currency,” said Michael Metcalfe, the bank’s global head of macro strategy.
“The question is how long they hold onto that position. It would benefit sterling if they decided to cash in, but there does seem to be the view that it will fall further.”
The last week’s sales were driven largely by hints from the Conservative ministers in charge of Britain’s external relations and talks with Brussels on how and when to leave the bloc, some of whom were among the strongest advocates of an “Out” vote.
Foreign Secretary Boris Johnson spurred sales of sterling last Thursday by saying it was likely London would set the clock ticking early next year under the EU Constitution’s Article 50, which gives the sides two years to complete preparations.
Scotland’s external affairs minister Fiona Hyslop also said on Monday that initial meetings with Brexit minister David Davis suggested Britain was on course for a sharper split.
Prime Minister May has yet to make her own position clear, saying only that the formal divorce notification will not be sent before the end of the year and that Britain will not get a bad deal.
Cesar Perez Ruiz, chief investment officer with Swiss wealth managers Pictet, said the economy’s apparent robustness threatened to strengthen the hand of hard liners on immigration and worsen the final outcome for markets.
He said that should bring investors back to the initial post-vote trades, where they sold sterling and bought blue-chip FTSE stocks which would benefit from a weak currency while selling mid-cap firms more dependent on imports from Europe.
Worries over growth would make the Bank of England cut interest rates further, he said.
“The BoE has a plan, which is good, but the bad news is the currency.”