London - It’s been a tumultuous two weeks for the pound, and all indications are that traders will have to get used to the volatility.
The UK currency is getting harder to trade, and to predict, because the nation’s vote to exit the European Union has changed the rules of engagement. Whereas before June 23 it was enough for investors to track the economy and Bank of England, now they have to follow, and react to, the political twists and turns of Brexit.
With new developments dripping out on an almost daily basis, the pound’s tumble has been marked with wide fluctuations, with its average daily trading range this month about 70 percent more than in the year before the referendum. Since falling in the aftermath of the vote, a measure of anticipated price swings for sterling is climbing faster than for any other major currency.
“It’s one thing to try and model an economic outlook, but when we’re trying to work out what the politicians are going to do, it’s impossible,” said Jane Foley, a senior currency strategist at Rabobank International in London. “Therefore it’s very likely that we’ll have markets reacting to headline news and we’ll have volatility. The warnings about Brexit are coming to fruition, and this week has marked a sea change in market sentiment.”
Price wars
From Tesco’s price dispute to the High Court action to stop the government unilaterally triggering Article 50, the political and economic noise that’s so perturbing markets isn’t going away anytime soon. It doesn’t help that there’s such a lack of clarity over what the government wants out of an eventual divorce agreement, with concern Prime Minister Theresa May will prioritise controlling immigration at the expense of free access to the single market sparking this month’s selling.
While the most attention-grabbing aspect of October’s volatility was last week’s flash crash, which saw the currency tumble more than 6 percent in just a few minutes of Asian trading, sterling’s day-to-day movements have become increasingly erratic, with the general downward trend punctuated by extreme movements in either direction, often in response to relatively innocuous news. On Wednesday, for example, sterling surged, then pared its advance, according to whether markets expected lawmakers to get to vote on the UK’s plan for quitting the EU.
More pain
Against that backdrop, Goldman Sachs Group, HSBC Holdings, Bank of America and Deutsche Bank AG all predict more pain for the pound, which has lost 17 percent of its value against the dollar this year in the worst performance of any major currency.
BOE Governor Mark Carney said today the exchange rate matters and that the central bank isn’t indifferent to the pound’s slide.
Sterling weakness “has much more to go”, said George Saravelos, global co-head of foreign-exchange research at Deutsche Bank in London. “Indeed, our aggressive forecasts” for the pound to fall about 6 percent by year-end, “may still be under-stating the level of weakness required”.
The pound fell 0.2 percent to $1.2234 as of 12pm London time on Friday, taking its decline this month to almost 6 percent. At 12.4 percent, one-month implied volatility in sterling is the highest among Group-of-10 currencies, and that gauge has climbed proportionally more in October than for any of the 31 major currencies tracked by Bloomberg.
Trading range
The currency’s average daily trading range this month has been 2.16 US cents, compared with 1.27 in the year before the Brexit referendum.
Rabobank sees the pound dropping to $1.18 by the middle of next year and weaker than the 31-year low of $1.1841 reached in the flash crash a week ago. Deutsche Bank, Germany’s biggest lender, forecasts a decline to $1.15 by year-end.
Bank of America strategist Kamal Sharma told Bloomberg Television yesterday that, based on its current rate of decline, sterling will drop to $1.05 by the end of next year. That’s approaching its low in 1985. Goldman Sachs analysts said this week the pound could fall a total of 25 percent by December 31 because of the Brexit vote, and that there’s “more scope for downward surprise” to their three-month forecast of $1.20.
HSBC is more pessimistic than most on the consequences of Britain quitting the world’s largest trading bloc, with a prediction for the pound to reach $1.10 by the end of next year.
“Straight up, our forecast for sterling is that it keeps getting weaker,” James Pomeroy, a London-based economist at Europe’s biggest bank, said in a Bloomberg Radio interview with Caroline Hepker and Manus Cranny. The UK currency is “sort of halfway there, and we’ve still got another 10 percent to go”.
BLOOMBERG