Sterling wilts under ‘Brexit’ pressure

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Less than a couple of months ago, investors appeared to feel neutral about political risk. Terror attacks in Paris and the shooting down of a Russian jet over Turkish airspace had little impact on the market.

It feels different now. Frazzled markets seem to be contributing to political risk. Market fear is amplifying every danger out there: Syria-Iran tensions, Isis, migrant crisis, and far-right election success.

This is also why sterling is under attack, the analysts say. With astonishing rapidity, a British vote to leave the EU has shot up the worry scale for investors.

UBS notes a spike in web searches for “Brexit” on Google since the start of 2016. But are investors Brexit-fixated just because the EU referendum year has probably arrived?

The pound has fallen 6.4 per cent over the past three months, but the pace of its decline has quickened as markets turned nasty in the new year.

Sterling is in investors’ sights because market anxiety is turning them away from anything deemed risky. Prices of UK credit default swaps have shot up since January 1. Right now, Brexit makes the UK feel like a risky asset.

That was far from the market’s view last year, as the pound drove on towards $1.60 and the Bank of England turned hawkish on rates.

There may be better reasons why sterling should fall. One of these is the dormant issue of the UK’s current account deficit, which is currently coming in at about 4.5 per cent of GDP. Another is the new dovish tone from the BoE.

However, political risk is the flavour of this sour month when it comes to bashing the pound. It is wilting even before David Cameron, prime minister, sets his EU referendum date.

Sterling came under some pressure ahead of the 2014 Scottish referendum and the 2015 general election. But nothing like to this extent — and never this early.

Wider market turmoil seems to be the explanation for this latest decline, not the prospect of the UK leaving the EU. If some normality is restored, it still may not be enough to stop the pound weakening further.

But it may put Brexit — and sterling’s real value — in a better context, and make investors more sanguine about political risk.

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