Brexit politics in the driving seat for unloved pound

Posted in Google Brexit News
at 2016.11.02
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Brexit politics in the driving seat for unloved pound

“Quite simply the best,” is how ex-Chancellor George Osborne described Mark Carney when he appointed him as the Bank of England governor in November, 2012. This week, Philip Hammond, who succeeded Mr Osborne after the Brexit vote, hailed the governor’s “highly effective leadership” as Mr Carney agreed to extend his term another year to June 2019.

Putting Mr Osborne’s hyperbole to one side, luring the Canadian central banker was something of a coup.

His decision to stay an extra year, quashing feverish speculation over the weekend that he would quit in 2018, should have provided relief to a febrile foreign exchange market that left sterling as the world’s worst-performing major currency in October.

It didn’t. The spike after Mr Carney’s extension was announced late on Monday quickly fizzled, in the latest evidence of the currency’s inability rally to on what should be good news. Last week’s better than third-quarter growth figures did not do it, while rising gilt yields haven’t helped, either.

The uncomfortable explanation, according to investors, is that politics have become the key driver of the pound since early October when prime minister Theresa May signalled the government’s appetite for a ‘Hard Brexit,’ in which control over migration would be prioritised over any access to Europe’s single market.

“The pound tries to go up, then stops. Investors are not buying the dip, they are looking to sell the pop,’’ says Alberto Gallo, head of macro strategies at Algebris Investments, a hedge fund.

Mrs May might have hoped that Nissan’s decision last week to build new models at its Sunderland plant would allay fears about inward investment into the UK after the Brexit vote, but has only raised questions about the sort of promises the Japanese carmaker received.

Paul Lambert, a currency manager at Insight Investment, ponders whether the government can make assurances to other foreign companies contemplating inward investment that little will change after Brexit. “I think we all know the answer is no, unless the decision to leave the EU is reversed,” he says.

Indeed, part of the currency market’s muted reaction to Mr Carney signing on for another year is that the long-term implications of Brexit for the economy are unclear and linked with politics, leaving the central bank only able to cushion any potential fallout.

“It is the long-term impact on investment, trade, productivity and growth that will ultimately determine the level of interest rates and the value of the pound and there is little anyone can do about that in the long term,” says Mr Lambert.

If sterling can’t rally, Mr Carney’s decision to stay 12 months longer has at least helped it stabilise.

However, Steven Barrow, a G10 FX strategist at Standard Bank, cautions that the benefits could be eroded if the attacks from some pro-Brexit politicians continue.

“The cost could come over the long haul if his position has been undermined by the political furore surrounding his pre-vote comments on the cost of Brexit,” he says. The pound’s precipitous decline last month has, of course, persuaded some that the currency is near a bottom.

Definitely, says Stephen Jen, head of investment fund Eurizon SLJ Capital. The pound is “fundamentally a good currency” and is “grossly undervalued”. For long-term investors, sterling could be “the buy of a lifetime”, he says.

Probably, thinks Steven Englander, Citigroup’s head of FX strategy. When a currency falls almost 20 per cent, people do come out of the woodwork wanting to buy sterling-denominated assets.

“Sterling is attractive — at $1.15, Mayfair is pretty cheap,” he says. Or put it another way, he says: you need a really good reason to keep selling the pound. “What’s in the market is hard Brexit. You need something worse than what the market is speculating, like nuclear Brexit.”

Maybe, but based on sterling’s current performance, it’s still a minority view. “I don’t think the market has priced in hard Brexit,” says Marc Chandler of Brown Brothers Harriman.

There’s a risk the UK is about to enter an environment made up of high inflation and low growth, with Mr Hammond happy for Mr Carney to unfurl more monetary easing. This has all the makings of “economic paralysis”, Mr Chandler says. “I don’t see how the UK becomes more prosperous around this,” says Mr Chandler.

The likelihood of the Federal Reserve tightening US monetary policy next month will not help, either. Potential respite for the currency might come if European political strains deepen, potentially over the Italian constitutional referendum next month.

But, for now, many potential pound buyers can’t see through the fog of the politics over Brexit.

Mr Lambert says there are some signs of “some clarity on the UK position regarding Brexit”, but little idea how European leaders will respond. Don’t expect the political shadow over the pound to clear quickly.

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Published at Wed, 02 Nov 2016 04:08:50 +0000

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