Friday 22 November 2019

Chaos at Westminster means sterling remains volatile

An Anti-Brexit campaigner outside the Houses of Parliament in London.. Photo: Stefan Rousseau/PA Wire
An Anti-Brexit campaigner outside the Houses of Parliament in London.. Photo: Stefan Rousseau/PA Wire

Comment: Justin Doyle

As we face yet another week of uncertainty over what decision the British political class will take on Brexit - whether it is a rupture, maintaining the status quo via an Article 50 extension or a high-risk new referendum - businesses are dealing with the fallout.

While it was always anticipated that Brexit negotiations would be difficult, the dearth of progress in the past 31 months is a grave concern and the volatility is making it very difficult for Irish exporters with trade ties to the UK to have certainty over margins.

This exercise in internal bickering and can-kicking has been more painful and time-consuming than we ever imagined. As we approach the March 29 ultimatum, the time bomb of a "no-deal Brexit" scenario has started to tick louder. What is surprising, however, is how well the UK economy has been performing in the face of this uncertainty.

Up to Christmas, all major economic data points - inflation, employment, growth and retail sales - were pointing to a reasonably robust economy, so much so that the Bank of England had hiked the base rate by two 0.25pc increments in recent months.

However, recent sales data from retailers for the crucial Christmas period may signal some weakness as the full realisation of the potential adverse effects of Brexit take hold.

As is the norm, though, it is sterling that historically tends to bear the burden of uncertainty. It suffered horrendously during the apex of the global financial crisis in 2008/09, and while not as violent or pronounced as 10 years ago, the pound has had little to cheer about since the shock referendum result of June 2016. That said, in recent weeks, the pound has continued to strengthen as fears of a no-deal Brexit dissipate. To say we are in uncharted waters is an understatement. The scale of political divisions within and without Westminster means the prospect of unprecedented alliances are becoming ever more real.

After a historic 230-vote defeat, Prime Minister Theresa May's withdrawal agreement was considered dead. However, given opposition to a no-deal Brexit in parliament, the past week has seen some Brexiteers come to a realisation that this could be their best chance at getting a Brexit of any form.

Furthermore, there have also been amendments proposed which appear to have cross-party support aimed at avoiding a no-deal Brexit.

This has boosted the pound, which traded at two-month highs against both the euro and dollar last week.

In particular, two amendments tabled by the Labour Party have been the main drivers behind the pound's recent uptick: Yvette Cooper's amendment, which opposes a "no deal" and also forces Mrs May to request an extension to Article 50 if a deal hasn't been approved by February 26; and leader Jeremy Corbyn's contribution, which again rules out a "no deal", proposes a move to a softer Brexit and suggests a vote on a second referendum.

If either are accepted, they would eliminate many pressing fears - March deadline, and cliff-edge Brexit - but prolong the agony.

As a net exporter to the UK, Ireland needs a strong UK economy and an even stronger pound is crucial for the export sector remaining competitive.

The aftershocks of the Brexit vote are still being felt, with the value of sterling affected. Before the vote in June 2016, Irish exporters were comfortable with the euro trading in a £0.70 to £0.80 range.

Now, with just two months left before "B Day" on March 29, sterling (at £0.87) is some 4pc stronger than it was just over three weeks ago, but the average rate has been close to £0.88 in the 30 months since the referendum vote.

We would be wary that the current GBP strength may be overdone, as we feel much of the relief is predicated on the expectation that an extension, or amendments to the withdrawal agreement, will be granted by the EU without opposition or conditions.

With the uncertainty, there is only one constant: with May, you must hedge.

  • Justin Doyle is senior currency dealer at Investec Treasury

Irish Independent

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