Saxo on Brexit: May clatters sterling to fresh 31-year low
- UK prime minister May has set deadline of March 31 for Brexit initiation
- Sterling has hit fresh 31-year low in aftermath
- Further dollar strength towards and after Friday's NFP could lead cable lower
UK prime minister Theresa May pulled the rug from underneath sterling this
weekend and that has sent the ailing UK currency to fresh 31-year lows. Photo: iStock
She may not have intended it, but Theresa May's shift to a 'hard' Brexit position over the weekend has not been kind to sterling.
The ailing UK currency hit a new 31-year low Tuesday afternoon at around the 1.2740 mark and for those of you who have a hard time remembering the last time sterling was this low, Mikhail Gorbachev had just come to power in the Soviet Union and was breathing new life into Cold-War relations, the Live Aid concerts for the starving in Ethiopia briefly convinced some of us we were moving into a better, more caring era and the construction of Japanese carmaker Nissan's new factory at Sunderland (more on that later) begun.
Dollar strength in 1985 was the bedrock on which that particular low was reached but, while there has been some appreciable dollar muscle in the last few days, it is the self-inflicted Brexit wound that has once again opened up the trapdoor from which there looks little chance of escape for sterling in the meantime.
Prime minister May has clearly been stung by criticism that her mantra 'Brexit means Brexit' had become nothing more than an empty soundbite and has seized the agenda again to hurtle headlong into Brexit by effectively setting March 31, 2017 as the deadline for initiating Article 50 of the Lisbon Treaty and placing the two-year exit process from the European Union in motion.
While that may have silenced some of the increasingly vociferous critics on the right of the party which have coalesced around the Boris-Johnson/Michael Gove-led Change Britain group, that has opened the PM up to criticism that she has damaged Britain's negotiation position through a self-imposed deadline.
While that is arguable, she has certainly once again clattered sterling which is down some 15% from the 1.50 high of June 23 when exit polls suggested the 'Remain' camp had won the day.
Sterling at fresh 31-year lows before 'recovering' to the 1.2765 level.
Naturally, the state of flux engulfing UK markets since the Brexit vote on June 23 means such fluctuations are inevitable but the creation of a 'new normal' at around the 1.30 handle almost certainly fell outside the expectations of those on either side of the vote.
Furthermore, the ongoing pull to the downside threatens even that totem with a whole gamut of doomsday predictions for the potential slide once again resurfacing. The 1.05 low of 1985 might not be attainable, but the advantage that Hillary Clinton has established in the presidential race over Donald Trump, the better data out of the US this week, and the 61% probability of a Federal Reserve move on US rates before the end of the year are all likely to be dollar-strength conducive and force the ailing pound ever further south.
Of course, the FTSE 100 has swung into action in the opposite direction given that it is made up of a large number of international companies and the Brexiteers will cheer this as evidence that sterling's demise is no bad thing. The boost to exports from a weak pound of course is undeniable and perhaps this is the more pertinent factor as we near the end of the phoney war and move into the real Brexit process.
FTSE 10 hits fresh highs
The international Monetary Fund, so often a source of doom and gloom, is also relatively upbeat on the UK economy raising its forecast from 1.7% to 1.8% for 2016, a change in tune from its pre-Brexit predictions, even if it has reined in 2017's growth prospects from 1.3% to 1.1%.
But, green shoots and the relative calm in the three months since June 23 notwithstanding, there is probably a stronger argument to be made for the shakiness of the whole Brexit process given that shifting positions on the part of the UK political leadership can have such profound implications so quickly.
Nissan has already expressed extreme reservations over the Brexit vote and the threat to the Sunderland plant is clear and present. And, just this morning, we highlighted in our Daily Morning Global Call the danger to the City of London from May's refusal to treat the Square Mile as a special case when she enters negotiations.
We're hardly in Brexit yet. What happens when we are?