Ster­ling crashes to low­est in a year to squeeze Ir­ish ex­porters

Irish Independent - Business Week - - Front Page - Tom Finn, Tommy Wilkes and Gavin McLough­lin

THE pound suf­fered a heavy sell-off yes­ter­day, skid­ding to its low­est level against the euro in al­most a year as mar­kets ramped up bets on Britain leav­ing the EU with­out an agree­ment with Brus­sels on their fu­ture re­la­tion­ship.

The slide against the euro, the big­gest one-day fall since the end of May, left the pound be­low 90 pence for the first time in nine months. That’s bad news for Ir­ish ex­porters to the UK be­cause it makes their goods more ex­pen­sive.

London-based traders re­ported a sig­nif­i­cant in­crease in in­vestors hedg­ing against a ‘no-deal’ Brexit, an event which could send ster­ling into freefall and hurt the UK econ­omy by rais­ing trade bar­ri­ers with the EU.

The ex­o­dus be­gan af­ter UK trade min­is­ter Liam Fox said on Sun­day there was up to a 60pc chance the coun­try could leave the Euro­pean Union next March with­out a trade deal in place.

There was no ob­vi­ous trig­ger for Wed­nes­day’s big moves lower, but rather a build­ing sense of in­vestor anx­i­ety as the clock ticks down to­wards a se­ries of EU-Britain meet­ings, start­ing in Septem­ber, with no agree­ment in sight.

Conor Haugh, head of re­tail cus­tomer busi­ness at Bank of Ire­land Global Mar­kets, said there was a “no­tice­able surge in cus­tomer hedg­ing over re­cent days de­spite sum­mer mar­kets”.

He said Mr Fox’s com­ments ap­pear to have “upped the ante on Theresa May af­ter her meet­ing last week with French pres­i­dent Macron couldn’t find a way around the cur­rent im­passe in trade talks”.

“With the next sched­uled ne­go­ti­a­tion date of Septem­ber 20 fast ap­proach­ing, reach­ing a mu­tual-agree­able con­clu­sion is in­creas­ingly be­com­ing a race against time, which is mak­ing mar­kets in­creas­ingly ner­vous and drag­ging down the pound.”

Ster­ling slumped half a per­cent ver­sus the euro to 90.175 pence. The pound fell to as low as $1.2859 against the dol­lar.

An­a­lysts said the pound was also be­ing hit by a grow­ing re­al­i­sa­tion that, af­ter last week’s Bank of Eng­land’s pol­icy meet­ing, UK in­ter­est rate in­creases were likely to be as lim­ited as one a year and con­tin­gent on a smooth Brexit.

“What we are see­ing is broad ster­ling weak­ness, a very ag­gres­sive weak­en­ing trend,” said Peter Kin­sella, strate­gist at Com­mon­wealth Bank of Aus­tralia.

The BoE raised rates from cri­sis-era lows last week, but few in­vestors saw the in­crease as a vote of con­fi­dence in the econ­omy with so much po­lit­i­cal un­cer­tainty ahead. “Some are think­ing in the mar­ket that the BoE raised in or­der to give them am­mu­ni­tion to cut rates in the face of a ‘no deal’,” said Neil Jones, head of hedge fund FX sales at Mizuho Bank.

Op­tions mar­kets sup­ported the idea that there would be lit­tle re­lief in the com­ing months for ster­ling.

Risk re­ver­sals – used com­monly to hedge against ex­pected cur­rency moves – in ster­ling/ dol­lar fell to their low­est since early March 2017. That in­di­cates a sharp rise in de­mand for ster­ling ‘puts’, or op­tions to sell the cur­rency.

Mor­gan Stan­ley an­a­lysts yes­ter­day rec­om­mended in­vestors take out a ster­ling hedge given the prospect of more volatil­ity on the hori­zon, but added that Britain was still likely to se­cure a deal with the EU.

Bri­tish Prime Min­is­ter May will dis­cuss Brexit with the EU’s 27 other lead­ers at an in­for­mal sum­mit in Aus­tria next month and meet with them again in Oc­to­ber to try to seal deals on the terms of Britain’s with­drawal.

The pound has fallen 10.6pc since mid-April ver­sus the dol­lar and is down al­most 5pc year-to-date. Traders are also pre­par­ing for Fri­day’s read­ing of se­cond-quar­ter Bri­tish eco­nomic growth num­bers, which might of­fer some re­lief.

Else­where, HSBC has shifted own­er­ship of its Pol­ish and Ir­ish sub­sidiaries from its London-based en­tity to its French unit, and will do so for seven more Euro­pean branches, as it pre­pares for Brexit.

The move is aimed at en­sur­ing HSBC can con­tinue to serve its Euro­pean cus­tomers ahead of Britain’s exit from the EU in March 2019, af­ter which UK-based firms are ex­pected to lose so-called pass­port­ing rights that al­low them to sell fi­nan­cial ser­vices in the bloc. (Reuters)

Liam Fox’s com­ments on a no-deal Brexit have ‘upped the ante on Theresa May’ af­ter her fail­ure to break the dead­lock

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