Wondering About The Impact Of The Brexit Impasse on Currency? Find Out More
Immediately after the Brexit vote on June 23rd, 2016, the British pound lost almost 10% of its value against the Singapore dollar. On June 24th, the pound lost 7.03% in relation to the SGD. The next day, it depreciated by another 2.55%.
GBP/SGD – Singapore dollar lost 10% against the British Pound immediately after the Brexit vote
Source – Yahoo Finance
Of course, the British pound’s value didn’t depreciate only against the Singapore dollar. On June 24th, 2016, sterling also dropped 8% in relation to the US dollar.
Why did the financial markets lose their faith in the British currency immediately after the referendum? Is the fall in sterling justified?
Brexit’s impact on Britain
When the UK’s citizens decided to leave the European Union, they probably didn’t realise the repercussions that their vote would have. At that time, George Osborne, the country’s chancellor of the exchequer, a position responsible for the nation’s finances, warned, “A vote to leave would represent an immediate and profound shock to our economy. That shock would push our economy into a recession and lead to an increase in unemployment of around 500,000.”
Mr Osborne went on to add, “GDP would be 3.6% smaller, average real wages would be lower, inflation higher, sterling weaker, house prices would be hit and public borrowing would rise compared with a vote to remain.”
Were the chancellor’s fears justified?
The economy has been hammered
The British economy has certainly not contracted since the referendum. In fact, it’s grown at about 1.5% per year since then.
But this figure could have been higher if it weren’t for the prospect of Brexit hanging over the country. In the middle of the last year, the governor of the Bank of England said that each British household had lost £900 because of the negative impact of Brexit.
Sadly, the economy’s prospects still don’t look too good. A composite index of service activity, manufacturing, and construction compiled by IHS Markit, a London-based firm that provides information and insights on business-related issues, declined to its lowest level in six years. Chris Williamson, chief economist at IHS Markit, says that Brexit has “led to an increasingly broad-based malaise.”
Manufacturers are moving out
In 2018, investment in the auto sector dropped by 46.5% compared to a year earlier. The primary reason was the approach of the Brexit deadline.
Britain’s auto industry exports a whopping 80% of its output. A no-deal Brexit could have a significant impact on overseas demand for British cars. Heavyweights like Jaguar Land Rover and BMW have already announced that they would slow down production.
The bad news doesn’t stop there. Honda Motor Co. has said that it will close its Swindon plant, Britain’s fourth-largest auto manufacturing unit. Nissan plans to cut production at its Sunderland factory.
London’s position as a world financial centre could take a hit
The British capital has traditionally been regarded as a key global financial centre. It shares this position with New York, Hong Kong, and Singapore. However, Brexit could rob London of its crown.
When London moves out of the European Union, its banks will face restrictions in dealing with their European customers. Brussels, the de facto capital of the EU, would insist on a European presence. In anticipation of this, several financial institutions have already taken preemptive steps:
⇨ Aviva, UK’s second largest insurer, has said that it will move £7.8 billion of assets to Ireland.
⇨ Bank of America Merrill Lynch is planning to shift large numbers of its staff to Paris. The cost of implementing this decision? £306 million.
⇨ Barclays says that it will move 150-200 employees to Dublin.
⇨ Credit Suisse is expected to relocate approximately 250 bankers to European cities.
The pound has yet to feel the impact of Brexit
The Brexit referendum took place almost three years ago. In its immediate aftermath, sterling slipped by nearly 10% against the Singapore dollar. There was a similar decline in comparison with the US dollar.
But, after the post-referendum fall, the British Pound has held its own. Consider its value since then:
|July 1, 2016||1.78||1.33|
|April 22, 2019||1.76||1.30|
Why has the value of the British pound remained practically constant since July 1, 2016? In the 34 months from July 2016 to April 2019, it has become increasingly apparent that the British economy will suffer as a consequence of Brexit. This should have led to further depreciation in the UK’s currency, but it has not.
Two Brexit deadlines have already come and gone. The “final” date of March 29, 2019, gave way to April 12. Now, the EU has granted the British parliament time up to October 31 to pass a Brexit deal.
But the extra time is no guarantee that there will be an amicable settlement to the Brexit imbroglio. Meanwhile, the value of the pound seems to be adopting a wait-and-watch attitude.
Recently, Capital Economics, a research consultancy, estimated sterling’s prospects based on the betting probabilities placed by bookmakers on the Brexit outcome. According to recent betting odds, there’s a greater than 50% chance that the UK will still be a part of the EU at the end of 2019.
What if that doesn’t happen? Remember that a no-deal Brexit is still a real possibility. In that scenario, the pound’s valuation could plummet to a level of US$1.15, the lowest in over 30 years.
It seems that currently, the pound’s valuation could be overly optimistic. Luis de Guindos, vice-president at the European Central Bank, the authority responsible for the euro and for administering the monetary policy of the Eurozone, thinks that the financial markets seem to be underpricing the probability of a no-deal Brexit.
The bottom line
Even Mike Carney, the governor of the Bank of England, doesn’t seem optimistic about the pound’s prospects. He says that the risk of a no-deal Brexit is “alarmingly high.”
What if Britain does crash out of the EU without a deal? If that happens, the pound is likely to see a steep decline. This factor doesn’t seem to be built into its current valuation.