As if the pound wasn’t suffering enough, it has now been dubbed the “de facto official opposition to the government’s policies”. That from HSBC’s chief currency strategist (and my former colleague) David Bloom, as the currency slumped amidst indications that we’ll see a “hard” Brexit. By contrast, the economic data of last week suggested the UK continues to expand at a not-too-shabby rate.
HSBC expects further misery with the pound heading for $1.10. But that wouldn't be as much about the “Brexit premium” as fundamentals - such as the whopping size of our trade deficit. But that trade gap existed ahead of 23 June (and could now be eased by the weaker pound eventually making our exports cheaper) - perhaps traders at that point were distracted.
As the shock of an "out" vote reverberated around London’s trading floors at the end of June, more than one economist admitted to me that the $1.34 or so sterling hovered around then was more in line with the underlying shape of our economy than pre-referendum levels. Speculation has always had an uneasy relationship with fundamentals in the currency markets. Add in relative interest rate movements (and expectations) and the Brexit fear factor, it’s easy to see how we’ve sunk to current levels.
It’s said that the value of the £ is our country’s share price. If so, why isn’t our CEO - Theresa May - trying to talk it back up? It may not be in her interest to do so. In the back rooms of 10 (& 11) Downing Street, they’re probably weighing up the pros and cons. On the downside, a weaker pound bumps up the price of imports ( Vin de Table may not be nearing Champagne territory but its inching closer) and so inflation, makes our holidays abroad more expensive and is poor PR for UK PLC. On the other, it makes our exports relatively attractive and an increase in inflation helps to erode the value of our massive government debt. In short, if sterling takes a pounding, the Treasury may be quids in.
Perhaps we shouldn’t be surprised that there hasn’t been a rush by officials to explain away that flash crash. Bank of England Governor, Mark Carney, is however addressing a forum on “...Maintain(ing) Stability in Time of Change” on Friday. It’s hard to see him avoiding comment.
He may be forced to - if currency weakness looking like tipping into sustained freefall. Activity in the market, the volume of bets against the pound, is at unprecedented levels. It’s a further sign that speculative activity and volatility will rule for the coming months - and that forecasting currency movements (always beset with risk) is harder than ever.
These may be respite for sterling as the Brexit process is clarified and gets underway. But in the meantime, it’s time to swap Camembert for Caerphilly if you want to keep the grocery bill down.