With GBP at 11 month low, Britain and its currency set to take off
Britain’s pound has hit an 11 month low, however the method by which Brexit is being conducted may well signal a massive boost for the world’s strongest major currency. Sentiment within the industry is positive.
Britain is rapidly becoming not only the world’s most important economy, but also a region which hosts the largest financial center on earth – London – and has the most sophisticated electronic trading ecosystem on the planet, with Tier 1 banks, prime of primes, and retail FX brokers with 30 years of market presence and several billions in market capitalization, operated by seasoned industry professionals with detailed understanding of the market.
Venture capital interest in British startups is at an all-time high, with ‘Brentry’ having become a phrase coined by those wishing to enter the British corporate arena following the country’s vote two years ago to go it alone as a beacon of commercial and technological success, freed from the burden of having to play a major role in sponsoring a non-productive, bureaucratic and outmoded mainland Europe.
Today, a boon for traders has manifested itself in the form of an 11-month low for the British Pound, which holds the accolade of being the world’s strongest mainland currency.
Left-leaning mainstream media consider this to be as a result of warnings which were issued over the weekend by international trade secretary Liam Fox that it was now more likely the UK would leave the EU without a deal.
This morning, the Pound dropped 0.3 per cent to $1.2954, its lowest since July 19, making it the biggest loser against a resurgent US dollar among major currencies and it fell 0.2 per cent against the euro to 89.15 pence.
It is well worth considering that these drops are caused by sentiment rather than reality, largely driven by news announcements which center on political events, and it is also a point to bear in mind that many of the voices that manage to position themselves on the bulbous side of a microphone and appear on televised coverage of the economy are often of the left, and therefore pro-EU membership, hence the negative results that show on the Pound’s value.
If this is the case, the markets may well become volatile when the business-friendly aspect of Britain leaving the EU makes itself apparent post-Brexit.
Of course the European Parliament along with many state-owned European entities would seek to undermine a ‘hard’ Brexit, that being an exit from the EU without aligned trade agreements with European Union member states at government level, largely because without London’s vast economic might and efficiency, Europe cannot ride the gravy train anymore.
This morning, in Moorgate, I was speaking to a senior executive of a FinTech company who is currently in London as his firm provides service to many large electronic and voice brokerages in the Square Mile (it is an American company), and his concensus was that Britain will absolutely flourish once out of the EU.
“It will become the Singapore or Hong Kong of the West, where global institutions, VC and wealth will flock in without the trade restrictions imposed by the EU, and without having to prop up a continent which has no real business to offer th UK” he said.
Indeed, that is quite likely. Last Friday, Bank of England governor Mark Carney said the chances of a no deal on Brexit were “uncomfortably high”, sending the pound below $1.30 for much of the day.
Usually, low value of currency can be correlated to poor economies, government corruption or lack of progress and economic development.
In Britain, the absolute opposite is true. Britain is now once again leading the world’s markets, developing the latest and most advanced financial markets systems, and is standing alone, free from European fiscal burden and anti-business bureaucracy to flourish. The stock market and housing markets have shown this. Consumer spending has shown this.
The real reason that the Pound is at a low point is that Britain now has to renegotiate all of its cross-border deals with other nations which may take a year or so, in order to stand as a separate and independent nation.
Indeed, the Pound remained the nation’s sovereign currency during its EU membership, but governance and answerability to a European Parliament and deep interaction with the European Central Bank as an integral component were part and parcel of Britain’s EU membership.
Now, liquidity arrangements, cross border transaction accountability, clearing and regulatory structures will have to be set out. This means a degree of Pound volatility, whilst the rest of the economy booms.
An additional factor is that the level of automation which interbank and institutional trading in London now relies on means that the speeds of execution are very high.
Looking at previous events in London are testimony to London’s position. At times of volatility such as the period during which Britain adjusts itself to independence from the EU could mean that algorithmic trading in the City could have contributed to the 2016 ‘flash crash’ in which the pound plunged by as much as 6% against the dollar during trading in Asia. The pound fell to $1.18 in a matter of minutes, hitting a 31-year low at one point, before recovering to $1.24 in May 2016.
Kathleen Brooks, Director of Research at City Index at the time said: “Apparently it was a rogue algorithm that triggered the sell-off after it picked up comments made by the French President, Francois Hollande, who said if Theresa May and co want hard Brexit, they will get hard Brexit.”
A kneejerk reaction from an automated system to the desperate words of a European socialist who cannot live without Britain’s sponsorship.
Rather than any firms leaving London for Europe, which will NOT happen, it is more likely that the opposite will be the case, in that many companies wishing to gain a place in the international center for financial services will move to London in order to gain top level access to the world’s businesses.