Sterling under the cosh

THE Prime Minister has been given a crash lesson this week on the workings of financial markets. By pledging to the Conservative Party conference that Article 50 would be invoked in March next year, she in effect kicked away the superstructure that has prevented the pound going into freefall.

Pre-Brexit sterling stood at $1.50 and in recent weeks, as strong economic numbers demonstrated that Britain was far away from recession, the dollar value settled at above $1.30.

Mrs May has provided some certainty to Brexiteers about her determination to get a new deal for Britain, but provided the hedge funds and other currency speculators with the confidence to bet against sterling.

The result has been a plunge in the currency to $1.26 in latest trading, which is the lowest level since 1985. No-one is yet speculating on dollar parity, a level last seen in February 1985, shortly before the historic Plaza Accord, which knocked back an overvalued dollar. But such an outcome is not out of the question.

Clearly, as the FTSE 100 demonstrated when it sailed through the 7,000 barrier earlier this week, a competitive pound is not without its winners. Britain’s most international firms stand to benefit from higher repatriated earnings and stronger exports. That is that, as long as our global exporters don’t simply see a weaker pound as an opportunity to increase their own profit margins rather than pass on the benefits to customers.

Even though past devaluations, most notably the exit from the Exchange Rate Mechanism in 1993, triggered an export boom, the impact was less long-lived than might have been hoped because exporters were greedy and the exchange rate crept up again on the back of the UK’s growth success.

Markets dislike the unknown and as the IMF’s managing director Christine Lagarde has pointed out, the exact nature of the trade deals to emerge and in particular the passport arrangement for banks, insurers and other financial services firms is a known unknown. Layered on top of this is another uncertainty. Monetary officials in Washington are not in the least convinced by the lineup of Brexit ministers appointed by May. Liam Fox at the new Department for International Trade was regarded as deeply underwhelming when he made his first postBrexit visit to Washington to meet with Obama trade negotiators.

David Davis, despite his superior business background at Tate & Lyle, is regarded as too mercurial. As for Boris Johnson, it is hugely difficult for him to shift the clownish image he has chosen to adopt in the past.

None of this is very encouraging. However, we should not forget that despite all of this, the UK is forecast to be the fastest-growing economy among the Group of Seven richest nations in 2016, due to its flexibility and resilience and a services sector which continues to boom. Moreover, Chancellor Philip Hammond’s pledge to keep Mark Carney as Governor of the Bank of England until 2021 adds some continuity and certainty. Markets always overdo it and the pound is certain to come back.

Gordon’s legacy

WHEN you are at the International Monetary Fund it is hard to escape the legacy of former Chancellor and PM Gordon Brown, who despite all his faults left an important imprint on global events. This time eight years ago he moved swiftly to recapitalise the banks he once lauded. But as importantly for the global economy, he also sparked major reforms of the monetary system so it was better able to deal with future crises.

Among his achievements was boosting the IMF’s resources so that if emergencies arose the fund had the ability to bailout even the most advanced countries. The special loan agreements put in place in 2009-10 in time for the IMF to rescue chunks of the eurozone are now running out.

So the defences are being rebuilt with pledges of £273bn of bilateral loans from 26 nations to boost rescue funds. Given the weakness of global growth, the new emergency resources can’t come quickly enough.

Tech threat

ALL those who thought Brexit was going to be the great transforming event of the decade should listen to the musings of John Chambers, the executive chairman of Silicon Valley telecoms giant Cisco. At a technology forum with Christine Lagarde, the Cisco boss frighteningly suggested that the rise of the technology intermediaries, such as Amazon, Uber, Lyft and Priceline, would kill 40pc of existing businesses and boost output growth by 3pc over the next decade.

As for Cisco itself, it is growing its new tech activities by leaps and bounds. Chambers says if it sees a technology it likes, it can bid on Friday, do the due diligence over the weekend and write a cheque for $3bn, or whatever the value is, by Monday morning.

Exciting, but running a very high risk when spending shareholders money.