by Ben Traynor
Posted 9th January 2017
Let’s start the week with a gratuitous chart.
This one from Bloomberg, doing the rounds online this morning, shows how three different currencies have fared against the US dollar since the start of 2016:
Click image to enlarge
Bad news for anyone holding Turkish Lira, Mexican Pesos and, erm, British Pounds.
You don’t need me to tell you there’s a lot more than dollar strength going on in that picture.
Yep, here we are again pondering sterling’s fortunes. And once again we have Theresa May to thank for the privilege.
The prime minister had wanted to talk about her visions for a “shared society” (no clue what “shared society” means but I’m sure, if pressed, May would tell us means “shared society”).
But that was always going to go in one ear and out the other as far as the press were concerned.
To be fair to May, she did her best to say nothing at all as usual. But her insistence that Britain cannot “keep bits of membership” after leaving the EU undid her.
Today’s papers have seized on that comment and are full of stories about how May will lead us out of the single market in order to take control of Britain’s borders.
I’ll be honest, I kind of thought that was obvious before she gave her interview yesterday.
My colleague Tom Tragett had the same thought.
“The fact that May hinted that access to the single market might have to be sacrificed for the sake of all-out border control and legal determination shouldn’t come as much of a surprise to any of us really,” he says.
“At least it doesn’t to me at any rate, but as I said from Berlin, there’s still a sizeable contingent out there that think all of these moving parts are somehow all achievable.”
As an added bonus, if you watch the vid I just linked to you get read someone call me fat in the comments! It’s a fair point…
Anyway, back to the pound. It’s too early to say whether the latest move is just a knee-jerk, sell-because-everyone-else-is move or the start of a new leg down.
Sterling’s future depends on how many investors are still clinging to the idea of a soft/long/mellow/business-as-more-or-less-usual-ish Brexit and whether events serve to shake them from their reverie.
How many businesses might still decide to sell pounds in order to hedge their exposure?
How many traders might pile in to sell the pound if this move gathers momentum?
“The biggest bet made by speculators across currencies last week was for further falls in the pound,” the FT tells us, citing futures data published late Friday.
The elevated short positioning could actually end up being a bullish factor if sterling confounds consensus and moves higher.
Why? Because all those shorts will have to buy the pound to close their positions and cut their losses.
However, Tom’s been looking at the charts, the same charts all currency traders will be eyeballing, and notes that the pound has broken “what was an interim double bottom”.
Translating from the technical analysis speak that I always find faintly amusing in a puerile way, that’s a bearish signal and one traders will have picked up on.
So watch out.
Taking a step back, I’m finding it easier to make the downside case than I am the upside one to be honest.
The upside case involves either U-turns from government on Brexit (or at least a substantial softening of the tone) or a fundamental reappraisal of what so-called hard Brexit means for sterling.
The first I see as unlikely. The “Bring it on then!” tone is there for political reasons that aren’t going to go away.
Peddling a softer line risks losing support and looking wishy-washy.
The second change, a reappraisal of Brexit’s exchange rate implications, will take place over years, not weeks, assuming it happens at all.
That, in thumbnail, is how I see the upside case from a fundamental perspective.
What about the downside case?
Well, as I touched on above, this involves more and more people coming round to the idea that this is real, it’s happening sooner than they’d like, and they can’t rely on ongoing membership benefits of transition arrangements.
Oh, and a reappraisal of Brexit could work the other way. So far there’s little hard evidence that inward investment has been substantially hit.
That may be because such fears are overblown.
Or it may be because such decisions have long lead times and there hasn’t been enough time for the referendum vote to have an impact, and we’re all still in wait-and-see mode.
Also, keep in mind that since the vote UK economic data have been broadly favourable, and the pound’s fallen a long way all the same.
If these data start to turn south – for whatever reason – it could put a dampener on the appetite for investing in Britain, with implications for the exchange rate.
Summing up, the upside factors look like they’d need a longer time frame to come about than the downside factors.
Put another way, against a backdrop of profound and ongoing uncertainty it takes less to trigger an air raid siren than it does to sound the all clear.
That’s my 10,000 feet Monday afternoon overview.
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