UBS Stick with Forecast for Pound / Euro Parity by End of 2017 – PSL

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Foreign exchange strategists at UBS are clinging onto their forecast that sees Pound Sterling depreciating to parity with the Euro in 2017.

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The call for the exchange rate to reach 1:1 comes despite recent resilience seen in Sterling.

Indeed, UBS argue that the market’s current view on Sterling is the result of an overly benign interpretation of “Hard” Brexit risks.

The crux of their argument lies in the UK’s Current Account deficit which remains wider – at 5% of GDP – than most other developed economies.

The wide deficit is caused by the UK’s reliance on imports and as such the country relies heavily on investor inflows to keep the currency stable.

The argument is that these inflows cannot be sustained when question marks are drawn with regards to the UK’s future trading relationship with Europe.

As such, the Pound will ultimately fall. But due to a rose-tinted view of how the economy will cope with a Brexit, as well as a result of negative sterling referendum hedges being unwound, the Pound has held up remarkably well.

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What could be potentially even more concerning than a straight rebalancing of the currency in order to close the trade gap is the impact a loss of access to the EU for the successful UK services sector.

This includes passporting rights for UK companies wishing to sell financial services on the European mainland.

UK Services, unlike goods, produce an healthy, offsetting surplus in trade which helps take the edge of the Current Account deficit.

But if the service (download apps at abokifx.com) sector is hit by loss of access to important EU markets due to Brexit, that important source of counterbalancing revenue would be lost, leading to a sudden ‘splits’ widening of the already overly deep Current Account deficit.

Such an outcome would be sure to result in a sudden rapid depreciation in the Pound.

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As such, much of the risk lies in how Britain successfully negotiates access to Europe for its services sector.

In the event of a loss in passporting, for example, 20% of revenue in the City could be lost overnight.

UBS are still bearish the Pound as they see the real Brexit tragedy taking place when the UK formerly withdraws from the single market, and see it as imperative the UK drives a hard bargain to protect its important services sector.

However, some will disagree with this assessment.

“The markets’ pessimism about Brexit is being turned on its head,” says George Trefgarne, founder of Boscobel & Partners. “Brexit was fought on an explicitly free-trade platform and the signing of new free trade agreements around the world, including with the EU. Insofar as there was a Protectionist Brexit faction, it has lost the subsequent, post-referendum argument.”

Trefgarne argues “the really big point is that far from being a tumultuous, cacophonic, unstable, firecracker of a polity, Brexit Britain is starting to feel like a relative island of calm, more at ease with itself than it has been for many years, led by a sort of 1950s Prime Minister, who is nearly 20 points ahead in the polls.”

Indeed, the spotlight of worry has swivelled round elsewhere, to Greece, France and to the United States.

“If Brexit is a revolution, it is so far turning out to be a very British and incremental one, lacking in violence or upset,” says Trefgarne.

With regards to passporting, some commentators point out that the significance of passporting is often over-exaggerated as many operators – especially large insurance companies – have EU-based subsidiaries which sell their services at arm’s length and are thus effectively immune to Brexit.

Other’s point to the exceptional resilience of the UK economy despite the uncertainty caused by Brexit, and the rebalancing already taking place in favour of the manufacturing sector.

“The bigger picture is that both hard economic data and business surveys suggest that growth has held up well and that there has been some rebalancing towards the manufacturing sector. Moreover, there is little evidence to support the conventional wisdom that the uncertainty associated with the transition to the new relationship with the EU will inevitably derail the economy,” says Andrew Kenningham at Capital Economics in a recent note seen by PSL.

 

Naija247news
Naija247newshttps://www.naija247news.com/
Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

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