Yahoo Finance 
BREXT Deal – Boon or Bane
By DAR Wong
Since June 2016, the UK voted for an exit from European Union. At that time, the people were frustrated with involuntary influx of Eastern Europeans resulting in increased social insecurity within the country. In addition, terrorism has haunted London city with looming fear among citizens.
Once upon a long time in history, Great Britain was once the wealthiest nation and most advanced country on the European continent. In fact, the British unveiled the first ever steam-locomotive train system and rail network in early 19th century, and then linked up the transport network throughout the continent for logistic and business expansion. As a result, modern Britain held a great sense of national pride.
Back in 1992, the Bank of England was holding on very low interest rate in spite of high inflation. In order to stay in the European Exchange Rate Mechanism (ERM), Britain hiked interest rate rapidly to the Pound above the agreed lower limit. However, it proved to be incapable of doing so and was forced to withdraw from the ERM. Ironically, George Soros made his billion by shorting the Pound heavily on the topside and pocketed, contributing to the Pound’s eventual collapse.
In current age of BREXIT issue, the UK Government is again fighting to be on its own and depart from the 28-bloc nations once Article-50 is activated. Obviously, the British voters have overlooked the supply of huge foreign labor in lower-income class, bilateral trade ties among European nations, cross border tax-incentives, mutual investments etc. when they voted for BREXIT. Now, the British cannot expect all the mutual benefits from the European Union once the country leaves to become economically independent on its own!
Of course, the advantages of BREXIT may be the relinquishment of all financial support to the ballooning sovereign debt of other European allies. However, we foresee a drastic fall in UK economic growth once BREXIT becomes reality especially due to shortage of blue collar labor and large withdrawal of foreign investments. While the UK Parliament is pressing Prime Minister Theresa May to strike a deal with European Commission to continue allowing Ireland to be a backstop, negotiations have stopped out of displeasure.
Theoretically, if a deal could be reached, Prime Minister Theresa May would be enshrined in Hall of Fame, while the Pound could rise back above USD/GBP 1.35 level. However, time is running out as the BREXIT deadline will fall on 29 March. On the other hand, a highly possible no-deal BREXIT may land UK in economic devastation and Pound will face another streak of meltdown in coming months. Furthermore, Prime Minister Theresa May would lose her political career if the situation turns unfavorable in UK’s interest. As other opposition parties continue to quibble and press for a resolution, no one seems to be able to “rectify” the situation unless BREXIT is reversed!
In coming months, we foresee the Dollar will soften in order to cushion for a potential rate hike in early May, while the Euro will rise on inverse correlation. Pound will become a catalyst in the tri-relationship with Euro and Dollar. If the Pound falls out of favor due to BREXIT and recedes against Dollar, Euro may advance at same rate in order to counterbalance the value of the Dollar.
In another hypothesis, the Pound may climb in-lieu of positive outcome of BREXIT delay or new deals granted by European Commission. Such situations will render the Euro to fall as a counterbalance to the value of the Dollar. In the situation of both Euro and Pound appreciating against the Dollar, we should see a rise in commodity prices starting from Crude and Gold.
In summary, we foresee the second quarter to be a season of high volatility in currency movements. Traders should pay more attention to fundamental changes and potential trend of the US Dollar as a main influence to other major currencies. In broader aspect, BREXIT will trigger some erratic fluctuations in regional stock markets and currencies. Stay alert for the market movements.
~ DAR Wong is a veteran in global financial markets based in Singapore. The opinions are solely at his own. He can be reached at dar@pwforex.com
Related Article:
