Forex traders see little solace in no-deal scenario

  • By Author

  • December 20, 2018
  • 8:50 pm BST

According to many traders, Forex trading with a GBP focus is precarious as a “no-deal Brexit” looms. These traders say that protections will not mitigate risks, and the UK’s exit from the EU is bound to sink the pound.

As the UK House of Commons hit gridlock over Prime Minister Theresa May’s proposal for a Brexit deal, some lawmakers suggested that the country can just leave the EU without a deal and proceed to take steps to contain the aftermath. Based on recent reports, the UK government has already published guidelines if such a scenario happens. While a “hard Brexit” was unlikely months ago, Charles Stanley noted that the chances of it happening now are at 40%.

Investec Asset Management Money Manager Russell Silberston said: “There is no majority whatsoever for a no-deal. If it were, it would be a disaster for UK assets; the pound would go down 5-10%.” Silberston believes that the British government and the EU will eventually reach an accord.

Opinions vary, but the Bloomberg British Pound Index tells of a lurking crisis as the pound heads for yet another drop. This will be its third monthly drop as politicians in Britain threaten to reject the deal that May and her backers have been working on for 18 months.

Both sides are now preparing contingency plans, but analysts noted that the EU will not allow mini deals to ease the chaos that the UK may face. The EU will reportedly take steps to protect itself, according to an insider.

The uncertainty of Brexit is detrimental to various assets and may even cause issues for the United States. In a managed hard Brexit, the pound could still drop to $1.20 on the US dollar, and a messy one could cause a plummet to $1.10. It traded at $1.2640 against the dollar on Tuesday.

Apart from a possible tumble for the pound, traders are worried about the lack of clarity regarding what a managed Brexit entails, as this does not help them with their strategy. Unlike in the past months, there is no hint of optimism regarding the situation.

“As one commentator said, it is just a ‘no-deal’ with ‘managed’ in front of it,” said Stuart Bennett, Head of Group-of-10 Currency Strategy at Banco Santander. According to Bennett, a managed Brexit implies a hard Brexit, something that the forex market will not like. He added that the pound might experience a 7% drop.

What this means for Australia

According to Australian Trade Minister Simon Birmingham, his country’s government will focus on trade negotiations with the EU. Australia will be strengthening existing trade agreements, specifically, its partnership agreement with Europe signed in August 2017. As of October 2018, the agreement has provisional status. Birmingham also noted that global economic uncertainty requires a swift resolution.

Turmoil in the UK will have a large impact on Australia’s stock markets. They should experience a decline, and this will also likely happen to the AUD. Bond yields may plummet as well because investors will be in a hurry to move their assets. According to experts, share prices will fall as sharply as they did in 2008. Government guarantees will have to be reinitiated based on an analysis of the current situation.

There is a bit of hope for Australia if Britain goes into a recession. Australia’s gold mining companies can provide a safe haven for many investors. However, experts noted that Australians who have assets and pensions in the UK need to brace for impact, as there will be negative consequences. Tourism will also suffer because the spending power of tourists from the UK will be a lot lower than before.

Australia can mitigate the short-term effects, but in the longer term, its trade will take a hit. Therefore, Birmingham will need to concentrate on strengthening relations between his country and the EU. Based on government data, exports play a crucial role in Australia’s gross domestic product (GDP). A crisis in the UK can have serious ramifications for Australia’s economic growth and may even result in a higher unemployment rate. Australia is one of the UK’s largest trade partners.

Experts added that Australia avoided the 2008 financial crisis, but another one brought about by a no-deal Brexit will likely be more devastating than expected.