Sunday 11 December 2016

Exporters to UK face sterling parity peril: global bank

Published 18/08/2016 | 02:30

Northern Ireland Secretary James Brokenshire at the Bushmills Distillery in Bushmills, Co Antrim, with distillery managing director Colm Egan (left), as he begins canvassing public opinion on the implications of Brexit on a two-week tour of the North
Northern Ireland Secretary James Brokenshire at the Bushmills Distillery in Bushmills, Co Antrim, with distillery managing director Colm Egan (left), as he begins canvassing public opinion on the implications of Brexit on a two-week tour of the North

Irish exporters may be facing more pain on the currency front as global bank HSBC predicts the euro will reach parity with sterling within 18 months, arguing further weakness is required for the UK economy.

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Swiss giant UBS and Spanish lender Santander have similar views, with the weakening in the pound set to remain for now as one of the biggest post-Brexit vote issues facing Irish business.

But specialist bank Investec isn't convinced parity will be reached, telling the Irish Independent that while the pound may flirt with the 90 pence range, it will ultimately settle around mid 80 pence.

Currency volatility has been one of the chief headaches for Irish business in the wake of the June 23 vote in the UK to pull out of the European Union.

The pound weakened to a three-year low this week as it tipped above 87 pence to the euro. By mid-afternoon yesterday it was at 0.865.

A weaker pound poses cost and competitiveness issues for Irish firms selling into the UK market, as it becomes more expensive for British consumers to buy their products, while firms in border areas could lose shoppers to Northern Ireland.

There are also implications for the tourist industry here, as Irish locations become more expensive for UK holidaymakers.

HSBC said sterling needs to weaken further to make UK assets attractive enough to foreign investors, given the current uncertainty.

By the end of this year, the bank said it will move above the 90 pence mark, and weaken further over the course of next year.

"The UK's structural weakness will put GBP under immense pressure. An ever-cheaper currency is required to fund the current account deficit," HSBC said in a report, co-authored by its Global Head of FX Strategy, David Bloom.

"We now see GBP-USD at 1.10 by the end of 2017, taking EUR-GBP to parity.

"This aligns with our economists' view that the Bank of England will ease even further, cutting rates by 15bp in November and expanding quantitative easing in February."

Business lobby groups here have said the currency issue is one of the biggest facing Irish exporters, with Ibec warning firms face a currency crisis akin to that of the early 1990s

UBS and Santander have similar views to HSBC. Santander says sterling/euro could move to 95 pence by summer 2017.

"Certainly 0.95 doesn't take much of an imagination and once you start touching 0.97/0.98, then people start focusing on it," its head of G10 FX Strategy, Stuart Bennett, told Bloomberg.

But specialist bank Investec isn't convinced.

"It's a brave call. Ourselves, and personally, I can't see it. Not in the short to medium term," Investec's senior treasury trader, Justin Doyle, told the Irish Independent. "There are a lot of forces at play. Obviously things are bad at the moment. It's [the data] all pointing to a weaker UK economy. So from that front, absolutely. But a lot of this has been priced in.

"If the data continues to come in weaker, we'll have to change our view. But our forecasts out towards the end of the year are sub 90 pence, anywhere between 85 and 90 pence."

He said the Bank of England could take further action in November if economic data is weak.

"But even at that, we just can't see parity. Even out to the end of 2017, we're in around 85 pence towards the end of 2017. We think it could have a go at the early 90s, but then settle down."

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