Issue of the week: sterling’s flash crash
Whether or not it was a technical glitch, the pound’s alarming plunge may signal trouble ahead
At just after midnight UK time last Friday morning, forex dealers in Asia “were jolted out of their routine contemplation of the currency markets by a sudden, inexplicable plunge in the value of the pound against the dollar”, said Nick Fletcher in The Guardian. In just eight minutes, “sterling suddenly fell off a cliff” – dropping more than 8% from $1.26 to $1.14 – a “huge plunge in a market where a single cent is a big change”. There was initial speculation that the fall was the result of a “fat finger” trade (when a dealer types in an incorrect figure). But the most popular theory was that computer-driven algorithmic systems had caused the damage, “because they are programmed to sell the pound on negative Brexit headlines”. According to this theory, the “algos” picked up a report quoting the French president, François Hollande, who had remarked the previous evening that Britain would have to “suffer” for the Brexit vote.
“When in doubt, the British blame a Frenchman,” said John Authers in the FT. But sterling’s second-biggest daily fall in 35 years cannot be all down to “an intemperate French politician”. Within hours, sterling recovered sharply, but it is still at a 31-year low against the dollar. When in trouble, British politicians tend to “throw their currency to the wolves”. This is no exception. “It is hard to imagine a more market-unfriendly version of Brexit” than the “cocktail of nationalism and statism” served up at the Tory party conference. “Hard Brexit” is “a frightening prospect for an island economy reliant on inward investment” to fund a “hefty” currentaccount deficit, said The Observer. Bank of England governor Mark Carney summed up the risks in January when he warned that Brexit could test “the kindness of strangers”. The pound has become a “political currency”. As HSBC’S David Bloom observed, sterling “is now the de facto official opposition to the Government’s policies”.
“Despite all the sniping”, there is still “much to recommend hard Brexit”, said Liam Halligan in The Sunday Telegraph. Indeed, the weaker pound is the best means of tackling our huge current account deficit, because it makes exports more competitive. The danger now is that “alarming currency swings and garish headlines” could “derail the UK’S strategy for leaving the EU”. PM Theresa May is publicly sanguine about the pound’s decline, said the FT. “But privately, senior Tories admit that sterling’s weakness could pose serious political problems if it persists”, and “imported” inflation erodes living standards. Investors are “unconvinced that her tactics will result in a good deal for Britain”. Sterling faces a bumpy road ahead.