The Brexodus Repercussions for Forex Investors

The UK election was won by a landslide by the Conservative party. Does this mean that we are one step close towards the end of the Brexit saga? Could we finally see a light at the end of the tunnel? Are we still going to be exposed to volatility in the single and forex market? What will happen next?In a nutshell, the Prime Minister’s withdrawal agreement will be brought back to the commons for agreement. Given that now the majority in the House of Commons are Conservatives, should make the deal relatively straightforward to pass. If accepted, in a matter of weeks after the 31st of January, trade talks can begin between the two sides. If the UK and its counter party agree to a trade deal by June 2020, then a new relationship can start to form by the beginning of January 2021.

For most investors this outcome was seen as an upside lift as can be seen by the recent positive performance of the FTSE 100 and FTSE 250, as at the time of writing. However not all investors are seeing it that way. In fact, when the Conservative party was announced as the winner, the sterling pound registered an increase of around a 2% when compared to the Dollar and Euro indicating that investors are increasing in confidence in favour of the sterling. However not all investors are counting their chickens before they hatch, as can be seen from the overnight high which came off within hours during the following day’s Euro trading session.

Currency strategists are expecting the surge to be contained as the UK enters the new and equally challenging phase of negotiating its future trading relationship with the bloc before the end of 2020. Expectations are that the country’s economic fundamentals could return to focus alongside trade discussions in driving the activity of the pound in the New Year.

“In the short term, the pound should now have a fairly calm trading pattern through to the New Year, providing some welcome respite to businesses and investors….However, the currency’s landscape over the next three months is less certain, and depends heavily on the 31st January Brexit deadline. If Boris Johnson’s deal is passed, we can expect another short rally in the pound, but after that date we are essentially entering the unknown.” Sebastien Clements, currency analyst at OFX (one of Australia’s large online foreign exchange company).

During trade negotiations the major priority for the UK should be to include a legislation that allows the UK to trade their goods and services within the EU. Mr Johnson has argued that as the UK is completely aligned to EU rules, the negotiation should be straightforward.

In my opinion the value of the sterling pound will then be contingent on progress in the UK’s trade talks with the EU and other trading partners. This may temporarily lead to the currency being reattached to traditional economic data rather than Brexit headlines in the media.

It might be a cobbled road with bumps and bruises until the finish line as the Conservatives are adamant that they do not want to form part of the customs union and single market. Critics have also pointed out that the UK wishes to have the freedom to diverge from EU rules so it can do deals with other countries. All of which will make negotiations more difficult and prolonged, meaning that there might be another extension which will again only amplify uncertainty and hence, volatility in the market.

Time is not on their side as for this to happen all the remaining 27 member states and the European parliament need to be in agreement. This trade deal needs to be done and dusted by June. This is the month that the UK would have to decide whether or not to extend the transition period but then again Boris Johnson already forestalled any form of extension. In fact the prime minister reiterated this statement on Tuesday morning through the UK’s local media. “This parliament is not going to waste the time of the nation in deadlock, and division and delay….We are going to get Brexit done… and we are going to get on with delivering on the priorities of the British people… after three and a half years of wrangling.” This led to a 1.4% drop in the sterling currency when compared to other currencies.

If an agreement is reached it has to be sanctioned before being implemented; a process that can take months to carry out. Throughout history there has been no record of any trade deal of this magnitude and complexity struck between the EU and any third party anywhere near as quickly as this timeframe. However the Prime Minister is confident and bullish that this will happen boldly stating to the media that, we, the public, “ain’t seen nothing yet.”

Therefore it is important for investors to know that in the international capital markets, a change in a currency’s value may give rise or loss to a foreign exchange. The appreciation or depreciation of a domestic currency raises or decreases the value of a financial instrument denominated in that currency. Investors who have a long position in sterling should consider investing in funds that have a currency hedge in place that will reduce their exposure to such currency risk. Hedging tools can also help investors not only reduce their portfolio currency risks or protect their gains but also potentially make profits. All in all, investors should consider strategies which protect them against inflation, interest rate changes and commodity price volatility.

Matthew Miceli Donnelly, ICIWM, B.Com Banking & Finance & Management (Melit.), B.Com (Hons.) Management, MBA (Melit.), is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]