GEN­TLE EU DE­PAR­TURE FAVOURED

Bri­tish pound on shaky ground as Brexit talks be­gin

The Star Early Edition - - BUSINESS REPORT - Anooja Deb­nath

THE FOR­MAL start of Brexit ne­go­ti­a­tions to­day may prove more of a cat­a­lyst for the pound than an in­con­clu­sive gen­eral elec­tion, a sur­prise hawk­ish shift by Bank of Eng­land of­fi­cials and a spate of dis­ap­point­ing eco­nomic data.

De­spite the raft of sur­prises to hit ster­ling this month, it’s set to record its tight­est monthly range ver­sus the euro since 2014. That may change as, al­most one year since Bri­tain voted to leave the EU, UK Brexit Sec­re­tary David Davis and his Euro­pean coun­ter­part Michel Barnier open ne­go­ti­a­tions.

The two sides will ham­mer out how talks will be struc­tured, whether there would be a tran­si­tional phase to help busi­nesses to re-ad­just to new rules and what the di­vorce would mean for rights of EU cit­i­zens liv­ing in the UK and Bri­tons liv­ing on the con­ti­nent.

In all of this, it’s the “tone” that in­ter­ests Richard Falken­hall, se­nior strate­gist at SEB in Stock­holm. He’s par­tic­u­larly keen to see how the two sides set­tle the con­tentious is­sue of the Brexit bill.

“The tone of the ne­go­ti­a­tions, whether they turn out to be con­struc­tive or the other way around, that may be very, very im­por­tant,” Falken­hall said. “One of the things they will start to dis­cuss now is how much the UK will have to pay to the EU, that will be very cru­cial. If they reach a so­lu­tion or get closer to each other on this, then I think it’s a very, very pos­i­tive sign.”

Tu­mul­tuous Time

The pound’s rel­a­tive re­silience to an oth­er­wise tu­mul­tuous time in Bri­tish his­tory is in con­trast with its swings in 2016. That year saw its big­gest daily drop on record in the af­ter­math of the UK’s shock vote to quit the EU and a mys­te­ri­ous flash crash in Oc­to­ber.

Ster­ling has traded in a range of 2.141 pence against the euro this month, the low­est since Au­gust 2014. The pound was at 87.52 pence per euro as of 3.40pm in Lon­don on Fri­day.

Falken­hall sees the pound weaken to around 91 pence per euro if talks turn “un­friendly”.

“The ac­tual out­come of the ne­go­ti­a­tions is still quite dif­fi­cult to pre­dict,” an­a­lysts at Credit Agri­cole, led by Valentin Mari­nov, head of Group-of-10 for­eign-ex­change strat­egy, wrote on Fri­day. They said their “long-term val­u­a­tion model still sug­gests that the best hedge against a po­ten­tial hard or dis­or­derly Brexit may be long EUR/GBP,” while the neart­erm out­look for ster­ling re­mains “ex­tremely chal­leng­ing.”

Mea­sures of im­plied price swings in the pound against the euro over the next one to three months are close to the low­est lev­els since 2015. While this is in part due to the global de­cline in volatil­ity, it could change should ster­ling closely follow ne­go­ti­a­tion head­lines.

The cur­rency’s volatil­ity should be “much higher than what we have right now and peo­ple are a bit too com­pla­cent,” SEB’s Falken­hall said. He sees the pound weaken to around 91 pence per euro if talks turn “un­friendly”.

Op­tions traders are more bear­ish on the pound than any other Group-of-10 cur­rency over the next three months, ac­cord­ing to risk-re­ver­sal data. The case for turning pos­i­tive on the pound still al­ludes most mar­ket par­tic­i­pants.

Robeco In­vest­ment So­lu­tions’ port­fo­lio man­ager Jeroen Blok­land said he has ini­ti­ated a long po­si­tion in the euro against ster­ling as “there is a chance Brexit could turn ugly.” – Bloomberg

PHOTO: BLOOMBERG

Theresa May, UK prime min­is­ter, leav­ing num­ber 10 Down­ing Street in Lon­don. May’s hard­line Brexit rhetoric has been re­pu­di­ated by her Chan­cel­lor of the Ex­che­quer Philip Ham­mond.

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