In a busy afternoon for global central banks, currency markets have been highly volatile. Perhaps the most significant publication of this afternoon was the Bank of England’s economic assessment upon monetary and financial stability given certain possible Brexit outcomes. The much-awaited publication responding to the House of Commons Treasury Committee attested to reasonable economic and financial certainty should the UK achieve a deal and continue with economic partnership with the European Union. The forecasts allowed for moderate divergences in economic prosperity depending upon the integration of trade post-Brexit, from a close to rather vague “less close” relationship. However, projecting a 25% depreciation in the value of the Pound Sterling under a condition of no-deal is compounded by the assumption of no transitional period. The implications of the Bank of England’s assessment include a GBPUSD rate of 0.96. One great British Pound would be worth around about 96 cents. If one can bare to consider the exchange rate of the Pound against what would presumably be an ailing Euro, the rate is close to 85 cents to the Pound. A visualisation of BoE Governor Carney’s forecast is included below:.
Markets should now be questioning where the mandate for economic and political security lies surrounding the Parliamentary vote schedule for the evening of the 11th December. Should the Pound evolve to attract a 25% discount given an extremely disorderly Brexit then the competitiveness of the United Kingdom would increase dramatically. However, with our greatest trading partner eliminated and the reversion back to a World Trade Organisation rule book, the advantage of competitiveness is necessary and dramatically reduced. In only a couple of week’s time, members of the House of Commons must ask themselves: is this the Brexit that the public of the United Kingdom voted for on 23rd June 2016? If it is, then economic partnership should be the path forward. The alternative, a vote to reject the deal, must either then result in a no deal or an extension or suspension of the Article 50 process. With Jay Powell, the Chairman of the United States’ Federal Reserve Bank, speaking at the time of writing, it is clear Trump’s admonitions to the central bank may have been heeded. Speaking of the need not to go too fast with the normalisation of monetary policy for fear of choking domestic growth, markets priced out value from the US Dollar, questioning its ability to deliver future value.
Today’s Global Market:
Discussion and Analysis by Charles Porter