Constant turmoil surrounding Brexit, Trump and populist movements across the world make for a very volatile trading landscape.
Here are Samuel Leach’s top trends and events that will cause currency fluctuations in 2019.
Brexit
No Deal
Parliament is saying that there’s no chance of a no-deal Brexit; however, May's deal has little hope of being passed in parliament.
This is causing huge uncertainty in the market and we could see GBP fall against its pairs along with weakness in FTSE. Evidence to the current uncertainty has been strengthened by the government emergency testing at Dover. A pile-up of lorries would be expected at customs if no deal is the outcome. There are stocks that could benefit from a weak pound due to most of its income coming from exports.
Deal
Although this is increasingly unlikely, if a deal is passed, I would expect the pound to strengthen against its pairs due to more certainty in the market. All indices have been in a bear market in the final quarter of 2018, so predicting the FTSE to go against the trend of its peers is unlikely. If we see other indices turn bullish there is no doubt that FTSE will follow.
Second Referendum
May reiterates that under no circumstance is this an option, however, it must be contemplated. If this does occur, a pop in GBP will be expected in the short term, and only when a result is concluded would a long-term trend be evaluated. If the public voted to leave again, we could see GBP/USD back to its low of 1.1/1.2. On the other hand, if the UK were to stay in the EU, there is no reason GBP/USD won't return to its pre-referendum price of 1.4.
If China does start to go into a recession as many expect, this is likely to travel around the world and other economies will follow.
US/China Trade relations
The US Dollar has been strong throughout 2018, however during the last few months of the year, we saw it starting to weaken. Bad trade relations have started to put pressure on both economies, with tariffs of up to 40% on exports like Soybeans from some US exporters, which has led to farmers becoming reliant on a $12billion bailout.
Even Apple has blamed its recent slowdown in iPhone sales on a weak Chinese economy. If China does start to go into a recession as many expect, this is likely to travel around the world and other economies will follow. China’s central bank has even cut the amount of cash it requires banks to hold in reserve for the 5th time in a year which has freed up $116biliion in cash for lending.
How this effects the dollar against the Yuan depends on which economy has the upper hand if more tariffs are implemented once the trade deal deadline passes. Trump has already increased import tax of $200billion on Chinese imports and is threatening with another $300billion, which would be crippling for the Chinese economy. In this case, I would expect to see the Yuan fall.
The Chinese government has made a statement saying it won't let the Yuan sustainably fall below 7 against the dollar. Many analysts suggest that the government has plenty of ways of stopping the Yuan from depreciating, and as The People’s Bank of China has successfully intervened in the past, there is no reason for them not to do it again if things were to worsen.
We should all be watching US interest rate hikes very closely over the next year.
Emerging economies to watch
Many analysts believe Indonesia is expected to be a leader in the emerging market within 2019. The country has low inflation compared to other emerging markets with high stability. Most analysts don’t see this trend slowing down in the region. If the US becomes more dovish with its rate hikes, this is expected to be beneficial to emerging markets and give a boost to emerging economies.
The area experienced a slight slowdown towards the end of 2018, which prompted the Bank of Indonesia to raise interest rates by 125 basis points since May and intervene in both the currency and bond market in the attempt to curb any losses. However, this economy is in a good place to benefit from any bounce in global economies.
US Interest rates
We should all be watching US interest rate hikes very closely over the next year, as this has a strong correlation to all US indices and the dollar index. The Fed is looking to be more dovish on its interest rates, however, two hikes are expected in 2019.
2019 will be characterised by uncertainty, and several geopolitical events will impact the foreign exchange markets. As with every form of trading, keeping on top of political events will be key for FX traders; the above are particular areas to stay on top of.
Amidst the recent shock resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson, investment uncertainty, slower economic growth and a weaker pound, the United Kingdom is on its way to a slow but steady Brexit, with negotiations about the future relations between the UK and the EU still taking place.
And whilst the full consequences of Britain’s vote to leave the EU are still not perceptible, Finance Monthly examines the effects of the vote on economic activity in the country thus far.
Do you remember the Leave campaign’s red bus with the promise of £350 million per week more for the NHS? Two years after the referendum that confirmed the UK’s decision to leave the European Union, the cost of Brexit to the UK economy is already £40bn and counting. Giving evidence to the Treasury Committee two months ago, the Governor of the Bank of England Mark Carney said the 2016 leave vote had already knocked 2% off the economy. This means that households are currently £900 worse off than they would have been if the UK decided to remain in the EU. Mr. Carney also added that the economy has underperformed Bank of England’s pre-referendum forecasts “and that the Leave vote, which prompted a record one-day fall in sterling, was the primary culprit”.
Moreover, recent analysis by the Centre for European Reform (CER) estimates that the UK economy is 2.1% smaller as a result of the Brexit decision. With a knock-on hit to the public finances of £23 billion per year, or £440 million per week, the UK has been losing nearly £100 million more, per week, than the £350 million that could have been ‘going to the NHS’.
Whether you’re pro or anti-Brexit, the facts speak for themselves – the UK’s economic growth is worsening. Even though it outperformed expectations after the referendum, the economy only grew by 0.1% in Q1, making the UK the slowest growing economy in the G7. According to the CER’s analysis, British economy was 2.1 % smaller in Q1 2018 than it would have been if the referendum had resulted in favour of Remain.
To illustrate the impact of Brexit, Chart 1 explores UK real growth, as opposed to that of the euro area between Q1 2011 and Q1 2018.
As Francesco Papadia of Bruegel, the European think tank that specialises in economics, notes, the EU has grown at a slower rate than the UK for most of the ‘European phase of the Great Recession’. However, since the beginning of 2017, only six months after the UK’s decision to leave the EU, the euro area began growing more than the UK.
Reflecting on the effect of Brexit for the rest of 2018, Sam Hill at RBC Capital Markets says that although real income growth should return, it is still expected to result in sub-par consumption growth. Headwinds to business investment could persist, whilst the offset from net trade remains underwhelming.”
All of these individual calculations and predictions are controversial, but producing estimates is a challenging task. However, what they show at this stage is that the Brexit vote has thus far left the country poorer and worse off, with the government’s negotiations with the EU threatening to make the situation even worse. Will Brexit look foolish in a decade’s time and is all of this a massive waste of time and money? Or is the price going to be worth it – will we see the ‘Brexit dream’ that campaigners and supporters believe in? Too many questions and not enough answers – and the clock is ticking faster than ever.
An independent study commissioned by Dun & Bradstreet reveals a UK business community that believes it has already lost out due to the EU referendum. When asked how the Brexit process has affected business finances, 43% of business leaders say they have felt a negative financial impact since the Brexit vote. More than a third (37%) say they have lost out on potential revenue and, on average, businesses say 19% of their revenue will be put at risk by Brexit.
Two years on from the vote, almost a third of business leaders (32%) reveal that their organisation has or is planning to reduce UK investment, and almost a quarter (23%) have already halted or slowed their plans for expansion in the UK. This suggests businesses could be considering moving activities elsewhere in the EU or beyond, or simply downsizing the scale of activities in the UK.
When asked about their initial reaction to the 2016 EU referendum in a previous survey, business leaders’ views mirrored those of the general population, with 42% saying it was positive and 41% negative. Despite this fairly even split of opinion initially, it appears that optimism has waned significantly since then. The recent study found only 23% of leaders feel that the impact of Brexit has been positive, with 42% citing that Brexit has had a negative influence on their business.
Political instability, including Brexit, has been the biggest challenge that the majority (51%) of businesses have faced over the past two years. Many are still unsure of how the negotiations and outcomes will affect their business and views remain split. Almost a quarter (24%) say leaving the single market will impact them most, followed by the regulatory landscape (18%), the length of the potential transition period (15%) and the settlement on migration (13%).
However, the research also highlighted that not all businesses believe Brexit will have an impact on their business, positively or negatively, and in fact, a fifth (21%) of businesses believe that Brexit will have no impact at all. Moreover, over half (51%) of business leaders feel the impact of Brexit has not been as negative as they first anticipated. Perhaps most critically, over half of businesses are confident that they will survive and thrive after Brexit.
Commenting on the results, Edward Thorne, Managing Director UK of Dun and Bradstreet said: “As we move closer to the Brexit deadline, it’s evident that there is still a high level of uncertainty amongst UK businesses about their future in a post-Brexit era. Our research suggests that businesses have already been affected financially and are still unclear about further impacts once the UK does leave the EU. How businesses get ahead and plan for Brexit will be crucial to their future success.”
(Source: Dun & Bradstreet)
The warning from Nigel Green, founder and CEO of deVere Group, follows the president of the Catalan government, Carles Puigdemont's, highly anticipated speech in which he said Catalans had “won their right to become an independent country” from Spain following the disputed referendum on 1st October. The Premier added that he will first seek to open a dialogue with Madrid.
Mr Green affirms: “The aftermath of geopolitical events of this magnitude have the potential to influence capital markets which, of course, drive investor returns.
“Up until now the chaos in Catalonia had been largely dismissed by global investors as a regional issue. However, now that Mr Puigdemont is effectively saying that Catalonia will become independent come what may, a considerably heightened game of cat and mouse between Barcelona and Madrid has been started – and this could have far-reaching economic consequences in the short and longer term.
“In the short term there will be ongoing and increasing uncertainty which is likely to create turbulence in the domestic and regional financial markets. In the longer term, if Catalonia splits, Spain’s economy – Europe’s fourth largest – could lose 20 per cent of its revenue. Plus the process could adversely affect investment into both Spain and Catalonia.”
He continues: “The Catalonia independence crisis could push Spain’s recent economic progress back. This would inevitably weaken the wider eurozone’s economic stability by pushing the bloc into another era of grinding uncertainty.
“This is perhaps especially concerning as we have recently had the German election, with Merkel returning but with a lower majority, and now we have the Austrian election, and the Italian one next year. And this is all against a backdrop of British PM, Theresa May, being urged to walk away from Brexit negotiations in Brussels if they fail to make progress this month.”
The deVere CEO says: “The chaos in Catalonia is a wake-up call for global investors to ensure that they are properly diversified across asset classes, sectors and regions, in order to mitigate the risks of the fall out of this and other key geopolitical events and also – crucially - to take advantage of significant opportunities that they simultaneously present.”
(Source: deVere Group)
Immediate market reaction to the illegal separatist referendum in Catalonia is likely to be muted – but what happens on the aftermath will be crucial, affirms the boss of one of the world’s largest independent financial services organisations.
Nigel Green, the founder and CEO of deVere Group, comments as Spanish police in riot gear moved in to prevent the ballot called by Catalonia’s regional government, but which Spain’s Constitutional Court banned from taking place.
Mr Green observes: “What is striking is how this chaos in Catalonia has been largely ignored to date by global investors, who last week appeared more preoccupied with Trump's proposed tax cuts and Angela Merkel's reduced political strength in the Reichstag.
“When global markets open Monday immediate reaction is likely to be muted too. The Spanish stock market is relatively small. The country represents just 5 per cent of the MSCI Europe index, compared to 28 per cent for the UK, 15 per cent for France and 14 per cent for Germany.
“Whilst it is a huge existential crisis for Spain and is a big geopolitical event, regional tensions such as these, rarely have the necessary might to considerably affect global trading. International commerce is stronger than all the sabre-rattling.
“It is unlikely that there will be immediate major portfolio rebalancing as a direct response to the events in Catalonia.”
He continues: “However, what happens next will be crucial for global investors. Neither Barcelona nor Madrid will back down on this issue. And now the genie of illegality is out of the bottle, there is little incentive for those supporting independence to put it back. Particularly if they can claim a majority of voters back their cause.
“Should the Catalans take further illegal action after the vote, and perhaps encourage civil disobedience, the uncertainty would create significant volatility and the outlook for the EU region's economy would darken and for Spain also. “The Catalan separatists’ ongoing campaign would also likely trigger a major destabilising effect as it would encourage other areas to vote for independence from the EU. Of course, against this backdrop, we could then expect the Euro would come under considerable pressure.”
Mr Green concludes: “Despite global financial markets largely shrugging off the events in Catalonia so far, it is important that investors keep their eyes on all major political events, including this one as how it plays out in the aftermath will be what matters.
“Investors must remain fully diversified across asset classes, sectors and regions, in order to safeguard and maximise their portfolios and to ensure they remain on track to achieve their long-term financial objectives.”
(Source: deVere Group)
(Source: Investec)
By Paresh Davdra, CEO & Co-founder of RationalFX & Xendpay
It was 1961 when Britain flustered into an application for membership of the European Economic Community – an initial step in the direction of something that would, over the years, translate to being a part of the world’s largest single market and by 1973, Britain was officially a part of the EEC.
The blueprint of this vision for the European Union, one that would be intrinsically linked on socio-economic paradigms, existed way before it was officially enacted upon under the treaty of Maastricht in 1993. The main reason for a Union was seen as a preventive measure against the possibility of future rises of nationalism, and along with this came the economic benefits through collaboration between a few of the world’s most productive countries.
In some ways, it feels like Britain’s membership of the European Union has come and gone quickly; what’s passed even quicker is the year since the UK decided to end their relationship with the EU. The implication of this development has affected more lives than one can count and of course has made a significant impact on the business sector of both the UK and the remaining EU 27 countries.
The immediate impact of the referendum was felt in the local currency valuation – in June 2016, the pound witnessed shock market devaluation as investors lost confidence in the UK’s future economic outlook. A total devaluation of 17% was immediately priced into the pound. Since then, a lot has transpired – we have faced the turbulence of the US presidential elections, which in addition to the June vote, appeared to spell an uncertain future of the global economic outlook. This did not change much, as uncertainty at home and uncertainty abroad combined began to affect the global markets, leaving investors riding on speculative waves through the initial months of Brexit and the US Presidential elections.
Then there was the legal challenge to the UK government’s ability to trigger Article 50 without going to Parliament. This entire affair actively shaped the market outlooks through the few months of court hearings and market fluctuations, with numerous ‘remainers’ possibly hoping for a U-turn on Brexit. Of course, this would not be the case in any way, yet the court hearings would see valuations of UK companies and the pound change within the course of mere minutes. Furthermore, organizations throughout the UK raised concerns over uncertainty of access to the single market, especially in light of immigration and passporting rights for employees, an aspect considered crucial by most international organizations that are headquartered in the UK, this story however, is on-going and much clarity is yet to be delivered.
Through the Brexit year, consumers have had to endure the news that Marmite and Nestlé coffee would now be more expensive, in addition to few other FMCG’s. At this point, organisations had already started to price in the beleaguered pound, as market confidence refused to budge. However, there seemed to be some hope for a few sectors of the UK economy; for instance, the export sector enjoyed the priced down costs on the back of the devalued pound – while the manufacturing sector faced the brunt of rising costs due to the same reason.
After the court hearing on triggering Article 50, a vote and a general debate in parliament raised points on mandatory mentions of key issues within the official notification for triggering Article 50. Thus began the process to pen down the divorce bill that marginally touched on issues such as promises of securing rights for EU citizens in the UK. Even though the picture appeared to be one of a panic struck market, in the initial days of 2017, we somehow found ourselves amid a seemingly buoyant economy. As UK organizations amended their overarching business plans, the economic data releases spoke a much sturdy language – bringing back hope to the UK’s future prospects as an independent economy.
On 29th March 2017, the Article 50 notification was presented to president Tusk, officially invoking Article 50 and starting two years of negotiations to establish a deal for the UK’s exit from the Union. In the letter presented to Donald Tusk, the UK acknowledged the ‘four freedoms’, the main doctrines that lie at the heart of the EU and buttress the single market. The UK pointed out that goods, capital, services, and labour are inseparable and emphasized that we are not pursuing association with the single market. Nevertheless, the importance of “economic and security cooperation” was emphasized on along with a stern mention of a “bold and ambitious” Free Trade Agreement that would encompass sectors crucial to the two linked economies such as financial services and network industries.
By now the markets have priced in the uncertainty of Britain’s future relationship with the EU, Prime Minister Theresa May has, on several occasions, announced a new outlook towards the world with a vision for a more ‘open’ Britain. The new outlook has brought to light new aspects of economic ties that Britain is seemingly inclined on exploring, especially the ‘look east’ policy – scouring trade ties with India and the Middle-East, either of which have not yielded concrete results thus far. However, this may not be the main challenge for the UK currently. The ability to maintain a skilled workforce along with seamless cooperation between international associations such as the regulatory authorities and other associations maintaining consistent global standards could be the challenge that we must address for a sustained outlook towards a better future, with or without the EU.
One year on since the referendum, much of the mist still remains. The way forward does appear clamorous with much room for scepticism, but being at the cross roads many times since the June vote has strengthened the ones involved, though it may be difficult to distract ourselves from hard economic truths – the way forward certainly does require hard work in truly looking at an independent and ‘open’ Britain.
The bravery of the UK is deeply reflected in its economic strength and the belief in itself is the key driver for the near future, the markets have righteously shrugged off the shock and scaled themselves to absorb even more. We are not at a time and place where a wait and see policy would flourish.
The United Kingdom’s decision to leave the European Union (EU) had a seismic impact on the global financial markets, and the geopolitics that sustain them. But what if the so-called Brexit referendum had a different result, and Britons voted to remain in the Single Market? Would we be any better off today? This week Finance Monthly heard from Evdokia Pitsillidou of easyMarkets regarding the titled question.
By any measure, the British pound may have certainly had a better fate had Britons voted Remain. Sterling was trading around $1.48 US on the eve of the June 23rd referendum, and even reached $1.50 just after polling stations had closed. Hours later, sterling was down to $1.33, having lost 10% against the dollar and reaching its lowest level in 31 years.[1]
But the bloodbath was not over. By October, the pound had dropped below $1.22 after newly appointed Prime Minister Theresa May signaled she would pursue a “hard Brexit” from Brussels. It was during this period that the sterling found itself trading at 168-year lows against a basket of other currencies.[2]
Although the pound was on a long-tern downtrend prior to Brexit, it is inconceivable it would have depreciated so quickly had the Brexit vote gone in favour of the Europhiles. Had the UK opted to remain, the pound may be lower than it was on the eve of the referendum, but not 18% lower as it is today. Brexit was therefore not just a defeat for the Europhiles, but for the once mighty sterling.
Brexit had the opposite effect on British stocks. The sharp depreciation in the pound was a boon to the export-oriented FTSE 100 Index, which opened 2017 on the longest run of record highs since 1984.[3] By January 10, London’s benchmark index had established its longest winning streak on record, printing nine straight days of record gains.
British stocks have returned nearly 19% since the Brexit referendum and are up more than 28% year-over-year. Underpinning their growth is more than just a weaker local currency. Less than two months after the Brexit vote, the Bank of England (BOE) slashed interest rates for the first time in over seven years and expanded the size of its asset buys in an extraordinary effort to stave off recession. The Bank’s moves may have been almost unthinkable had the UK voted to remain.
Just a few years prior, experts had tipped the BOE to be the first major central bank to raise interest rates. While the Fed beat it to the punch, it highlights just how unlikely the Bank’s rate cut would have been had Brexit gone the other way.
For policymakers, the hefty dose of monetary easing was justified, given they had just made their biggest quarterly downgrade of growth forecasts on record.[4] Thankfully, the British economy has held relatively firm over the past seven months, but that may to change moving forward once the British government triggers Article 50 of the Lisbon Treaty, the formal mechanism for leaving the EU.
Brexit may have also unleashed a wave of pent-up populism across Europe that is threatening to leave Brussels behind. Following the UK vote, nationalist movements in France, Germany and Italy are awaiting their opportunity to break away from Brussels. With elections in France and Germany coming up, investors are bracing for a potentially volatile year in the market.
The outlook on the global market wasn’t good before Brexit, and it certainly isn’t any better in the wake of the landmark vote. Concerns about free trade, economic growth and financial market stability have been exacerbated by Brexit, and the negotiations for the separation have yet to even begin.
A High Court ruling last month stipulated that Brexit cannot happen without parliamentary assent, setting the stage for a bigger legal battle for the British government. Prime Minister May appealed the decision, but may be upheld by the Supreme Court later this month.[5] For the Brexiters, this may mean a contingency plan. For investors, this may mean greater uncertainty about when, and if, Article 50 will be implemented. And as we know, uncertainty is the bane of the financial markets.
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