A weaker currency usually makes the country’s export more attractive and we have seen this story playing really well
over in Europe when the European Central Bank deliberately tried to push the currency lower.
However, in the UK, the Bank of England didn’t have to take such measures because the chaos of Britain’s divorce has
done the job. The sterling-dollar pair dropped near the 1.18 mark from its previous high of 1.71 (back in mid-June 2014)
after the Brexit vote and only once it has crossed the level of 1.40 and that was during the month of April in 2018. It
is trading near the 1.27 mark against the dollar. This weakness in sterling has helped the country’s export to an extent
and there is no doubt that it has a meaningful impact on Germany’s export industry. However, this isn’t going to have
the same impact in the coming days.
A hard Brexit will only make the matters worse and the only good thing which will come out of that will be a huge
devaluation in the currency. But such kind of devaluation may not have a direct impact on the country’s export as
Britain would have to strike separate agreements with each country.
The deadline for Brexit is getting closer (March 29) and the upcoming next week’s Parliament vote on Jan 15 is the most
important one. It will determine if the UK is going to have orderly Brexit or just going to crash out of Europe.
On January 15th, Theresa May is going to put the vote in parliament and she is hopeful that the parliament will support
her deal. Although the chances of such are slim. We do think that there are chances that the final result may be very
close and if that is the case then it is highly that Theresa May will push the vote again in the parliament and actually
get things done.
So just how things can go next week and their effect, here is what we think
The current deal goes to the parliament and if by any miracle parliament passes the vote then we move to the transition
stage. The final outcome could be one of the followings
a. Canadian style: Free trade agreement and if this happens we expect the UK’s GDP would shrink more than 4% in the
coming 10 years while the European economies will enjoy the benefit of free trade and continue to grow their economies.
The sterling could go all the 1.05 (against the dollar) mark and the parity calls may become stronger.
c. Customs agreement: This is something which is on the cards more than anything and under such a scenario, the
impact may not be that much devastating but the UK’s economy would shrink by over 3% while the European economies would
do much better than the UK. Sterling is likely to drop its Brexit vote low of 1.18 against the dollar.
The outcome of the vote is close and Theresa May pulls what she does the best, avoid all the odds and puts the vote back
to the parliament and get it across the line. Then we move on the transition period and after that, we have the same
three options which are mentioned above in Scenario one.
Finally an interesting outcome and Theresa May losses the vote. Under those circumstances, Britain faces its worst fear.
a. If she stays in power, then “No Deal”, WTO arrangement becomes a reality. This will be no short of Armageddon,
the country’s economy will plunge and Britain will see the darkest days in its history. The UK’s economy will shrink in
excess of 7%. The Sterling may drop even below parity against the dollar.
However, two more things can also happen
i. General Election: The impact of this on sterling may not be that strong in fact, it is likely that investors start to
push the currency higher and the clouds of uncertainty start to fade away.
ii. Second Referendum: This will be the best option and under this scenario, we could see the reverse of what happened
back in June 2016 for sterling. Sterling could jump well above the 1.70 mark against the pound.