The only surprise is that it's a surprise (apparently) ......

Monday 3rd October 2016

The only surprise is that it's a surprise (apparently) ......

ref:- "Pound Nears Three-Decade Low as May Sets Date for Brexit Trigger", Bloomberg Online

More concerted selling of sterling this morning after British PM Theresa May's weekend confirmation that the UK's withdrawal process from the EU would start by the end of March 2017. GBP / USD has made a low around 1.2850 this morning (1.2872 as we write), only a smidgeon higher that the 1.2798 low posted in the immediate post-referendum slump. A break of that level and we'll be in territory not seen since the mid-1980s, and the Bloomberg British Pound Index now puts sterling at its lowest level against a basket of major currencies since 2004.

The ultra-bearish sentiment towards the UK currency has been stoked not so much by the setting of a firm date for invoking Article 50 (which will begin the two year negotiation period culminating in Britain's departure), but by a growing realisation of what form that departure might take. We're talking "Soft Brexit" or "Hard Brexit" here. "Soft Brexit" is the scenario that pictures Britain making concessions on immigration curbs in return for partial or even total access to the EU's free market. "Hard Brexit" on the other hand entails the UK playing hardball on immigration (or more accurately the free movement of people within the EU), and incurring severe restrictions on access to those markets. It seems that quite a few are only now waking up to the fact that the UK is firmly headed down this harder road, though to be perfectly frank any idea that a win/win compromise was achievable has looked like pie in the sky for a long time  ..... arguably since the referendum itself.

Why so? Immigration became the leading issue on the agenda for Brexiteers during the referendum, a referendum that the Brexiteers won, and Theresa May has repeatedly stressed that "Brexit means Brexit". Ergo, it follows that she is committed to enforcing those immigration curbs despite the economic cost  of doing so (and even the personal views of anyone in her position). That was the narrow but decisive vote of the British people. Economists and politicians can make as many counter-arguments as they like, but to ignore the expressed will of the electorate (as evidence by the Leave vote) would see them accused of the very thing that drove voters across the globe away from the political and wealthy elites towards a populist agenda in the first place. Ms May says that she wants to retain access to the single market as well as curbing immigration but it's hard to see how she's going to achieve that. If, as is very possible, the two prove mutually exclusive then as things stand the immigration issue takes precedence.

So,  if it's to be a "Hard Brexit" does that mean that things are going to be unremittingly bad for UK Ltd and for the Pound? We've always thought that the impressively resilient data since the referendum (including today's strong Factory Purchasing Managers report) is misleading if undeniably welcome in the short-term. Let's face it, it'll be months and years before we know the exact shape of Britain's future relationship with Europe. The tough negotiating has not even started but it would seem naively optimistic for any Brit to expect the EU to go far out of its way to accommodate a soon-to-be ex-partner who wants the benefits of membership without the pain, as they might see it.

In short, the argument goes that the tough times all lie ahead for the UK and therefore Sterling is bound to come under further significant pressure. Don't forget that before a sense of calm descended upon the markets in early July (the Phoney War?), in the immediate aftermath of the vote a host of major names had been calling GBP / USD down to 1.16 or so. It's quite likely we'll hear those calls again.

The counter-argument is that the already weaker currency is a boon to British exports and the economy as a whole. There's also the point that the EU is facing a tough time itself economically, politically and in terms of trying to keep a lid on a potential banking crisis. The time may come in the not-too-distant future when Sterling looks a safer bet than the Euro ...... it might happen.

Well, yes it might at some point but right now the only thing that's certain is that Sterling, against any other currency, is going to be pretty volatile and trading it will not be for the faint-hearted.