What impact will triggering Article 50 have on Sterling and what can you do about it?
What impact will triggering Article 50 have on Sterling and what can you do about it?
Ever since the polls closed and the results were announced on the 24th June we knew the UK was going to leave the UK. Yes there were some challenges along the way but now the day is coming that Teresa May will trigger Article 50 so the UK can formally begin the process of leaving the EU. Article 50 itself may only be five paragraphs, but the negotiation of exiting 43 years of treaties and agreements covering thousands of areas will involve thousands and thousands of paragraphs.
The day Article 50 is triggered is Wednesday 29th March 2017.
Sterling slumped the day after the referendum and is currently 15% lower against the US Dollar, 10% lower against the Euro, 17% lower against the Australian Dollar and 13% lower against the NZ Dollar compared to where it was the day before the EU referendum.
Predictions of immediate doom post the referendum have not been accurate. The IMF, in October 2016, forecast the UK will be the fastest growing of all G7 countries; they did also say that post Brexit UK GDP would fall to 1.1%. UK inflation has risen to its highest rate for three and a half years but unemployment has continued to fall and is currently at an 11 year low of 4.8%.
What will come of Sterling on the 29th March 2017?
The currency markets are the biggest market in the world with $3 trillion traded daily (Investopedia). To put that into context, £1.26 billion was traded in the UK during 2016 on the FTSE 100 (LSEG). A market therefore with $3 trillion of daily activity has a huge number of participants (banks, hedge funds, FTSE 100 companies, private clients, holiday makers etc. etc.) and a huge number of opinions.
A quick Google search reveals that Barclays “expect the triggering of Article 50 to initiate a ‘sell the rumour, buy the fact’ rebound in Sterling”. Morgan Stanley also believe that Brexit uncertainty has already been priced into Sterling. Could it be that the official start in Brexit negotiations brings with it welcome clarity that is ultimately good for Sterling?
Rabobank however believe “the longer the uncertainty over the UK’s future trading relationship with the EU lasts, the longer the potential downside pressure” on Sterling. CNBC also “expect near term Sterling negativity” with further declines in the value of the pound.
A senior UK economist at Berenberg Bank explains “that the value of Sterling remains the best barometer of market sentiment. If Teresa May takes a non-confrontational approach and signals a desire to maintain a high degree of openness to the UK for EU workers, markets could react positively in the coming months”.
Right now, no-one knows. It could go up. It could go down.
What can I do about my currency requirements now?
Well, you can…
- Buy or sell the currency you need to trade before Article 50 is triggered?
- Wait and hope the exchange rate moves in your favour when Article 50 is triggered?
- Do a bit of both and hedge your risk.
The first option will eliminate all currency risk by simply trading before the event. If you need to buy NZ Dollars for example, Sterling is currently at the 2017 high where as if you need to sell US Dollars, it has only been this low for 11 weeks in the last 884 weeks.
The second option is the most risky, will depend on your scenario and the strength of your conviction on what the exchange rates are going to do. If you are holding currency, if could be that you think Article 50 will see the rate fall and you will be better off. If you are in the process of moving overseas or buying a property abroad, can you afford to take the risk over your future wealth or that your overseas property will cost more?
Finally, do a bit of both. This is currently the tactic a lot of our business customers and some of our private clients are employing. If you are emigrating and are looking to move to Australia, you could look to transfer 50% of your funds now and leave 50% behind to transfer at a later date. There is a still a risk but a more calculated risk. You could even go a step further if you are running a business or buying an overseas property by covering 40% of your requirements forward, 30% now and leave the remaining 30% until after the event.